Friday, July 22, 2011

11 Days and Counting

It's Friday afternoon, July 22. Move the clock forward 11 days, and we are Tuesday afternoon, August 2. What do we see? Calamity or Calm?

My prediction is Calm.  What support can I offer?

Not much. Intuition mostly. Watched a short clip of Obama talking to college students this morning. Seemed very relaxed. Joked lightly that it was great to get out of Washington, "...because you know how much fun it can be to sit hour after hour in meetings going through the budget..." For me, it's good stuff. He's not taking the problems casually, but he still has a sense of perspective and humor. This attitude can develop confidence in observers that there will be a positive resolution.

Here are some fairly random thoughts and observations.

The truly frightening Cut, Cap and Balance Bill was tabled in the Senate on a party line vote. As predicted, and thankfully, it was DOA. Yesterday, the Majority Leader was saying the Senate would stay in session through the weekend to work on the McConnell-Reid backup plan. Around midday, Reid sent the Senate home for the weekend, saying the Senate would wait for the House to act. Presumably, this means the Senate will wait to see if the President and Speaker Boehner can stitch together a Grand Bargain.

Yesterday afternoon, Democrats went ballistic when rumors of a New Grand Deal between the Speaker and the President surfaced - with the possibility that Obama was willing to punt on revenues. Budget Director Lew was almost attacked by angry Democratic Senators. Reid and Pelosi then  spent two hours last evening at the White House. Today, at 4:37pm EDT, the Wall Street Journal ran a story headlined "Obama Insists a Debt Deal Will Include Tax Revenues".

So what's up?

The House Republican Plan to a debt ceiling increase - Cut, Cap and Balance, is dead.

Reid is holding back action on the fallback McConnell-Reid plan, in part because House Republican freshmen hate it. I also think he was encouraged to do so by the President in their meeting last night at the White House. Obama wants to put maximum pressure on both sides to do a Big Deal, with no easy alternatives. This is why he took the fierce stand that he did with Eric Cantor, who kept asking for him to consider a short term increase. This morning, Charles Krauthammer called for $500 billion in spending cuts with a short term debt ceiling increase (Krauthammer - Investors' Business Daily). But Obama absolutely will not go this way, and Speaker Boehner and Eric Cantor know it.

So what will the Grand Deal look like? Overall: About $3 trillion in cuts and $400 billion - $1 trillion in revenues. Discretionary, defense and entitlement spending will all be included, some with specific numbers; others with policy directions to Committee Chairmen and policy intention guidelines. Revenues will be policy guideline estimates based on comprehensive tax reform. What allegedly is still at issue is what penalty triggers need to be in place to ensure both sides deliver. Democrats are saying: high end tax cuts. Republicans have countered with eliminate the personal mandate in the ACA bill.

We must wait to see how this plays out. The President has been fiercely hammered by progressives for seeming to "snatch defeat from the jaws of victory". Democrats were winning the PR battle, so why give any ground on revenues now? And the high end tax cuts expire at the end of 2012? This is not an effective trigger to get Republicans to perform: it's going to happen anyway.

Despite this strong pushback, it looks like the Democratic leadership team is standing with the President.

Will this play out this weekend? It might. I'm not sure. What happens if we get to mid-week with no agreement on a Grand Deal? I think the McConnell-Reid Bill will be rushed forward and voted on over next weekend. If it passes, we have calm waters.

And if it doesn't pass? I believe the President will exercise the 14th Amendment Defense, or simply tell Treasury to keep paying the bills without issuing new debt. Remember: we don't need debt to fund the government. That's a convention, not an economic necessity.

The good news is: the drama will be done in 11 days.

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