07.31.11

The 11th-Hour Debt Deal

A visibly relieved Harry Reid and Mitch McConnell announced a last-minute debt agreement to avoid default late Sunday—and now they have to beat the clock and persuade their party caucuses to vote for it.

Months of tension and gridlock ended Sunday night when President Barack Obama and congressional leaders of both parties reached a breakthrough compromise to trim trillions off the federal debt in the next decade and raise the debt limit so the country can pay its bills through 2012.

Now all they have to do is sell it to enough Democrats and Republicans for it pass the House and the Senate. By Tuesday.

Obama, Senate Majority Leader Harry Reid, and Senate Republican leader Mitch McConnell appeared visibly relieved as they told the nation of the 11th-hour agreement, which came as Asian markets were opening for business. Reid said the compromise ends a “dangerous standoff” that risked “a United States financial collapse and a worldwide depression.” McConnell called it “an important moment” for the country.

The national debt was closing in on $14.6 trillion on Sunday night. The Obama administration has said America will run out of money to pay its obligations on Tuesday.

“Is this the deal I would have preferred? No,” Obama said in a brief appearance at the White House. But he said it does make “a serious down payment” on deficit reduction. “Most importantly, it will allow us to avoid default and end the crisis that Washington imposed on the rest of America,” he said. “It ensures also that we will not face this same kind of crisis again in six months, or eight months, or 12 months. And it will begin to lift the cloud of debt and the cloud of uncertainty that hangs over our economy.”

A debt limit high enough to get past the 2012 election has been a top priority for Obama. According to the White House, the agreement authorizes Obama to increase the debt limit by $2.1 trillion, eliminating the need for further increases until 2013.

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Republicans, aiming for another showdown in six months, claimed Obama had political reasons for insisting on the longer time frame. Some financial analysts, however, said that is the only way to avoid a downgrade of the U.S.’ triple-A credit rating—a development that could prove expensive for ordinary Americans by pushing up interest rates on credit cards, mortgages, and all kinds of loans.

The White House said the deal contains nearly $1 trillion in spending cuts, enacted immediately, that will be balanced between defense and non-defense spending. A bipartisan committee of senators and House members will identify an additional $1.5 trillion in deficit reduction, including from entitlement and tax reform, by Nov. 23. Congress would have to vote up or down on the package by Dec. 23.

“In this stage everything will be on the table,” Obama said, including tax breaks and deductions for the country’s wealthiest individuals and largest corporations. Congress will get to vote yes or no on the package; if the effort fails, “tough cuts” will automatically go into effect, Obama said.

If the committee fails, automatic spending cuts would be triggered in 2013, split equally between domestic and defense spending. Social Security, Medicaid, Medicare beneficiaries, unemployment benefits, and low-income programs would be protected. Veterans benefits and military pay would also be spared, according to a presentation House Speaker John Boehner gave his members.

“We’ve stopping a job-killing national default that none of us wanted,” said Boehner.

In his call to fellow House Republicans, Boehner did not make it sound like everything would be on the table in phase two. He said the agreement shows how the GOP and its Tea Party contingent have changed the terms of debate in Washington, and said it does not violate their principles. “It’s all spending cuts,” he said. “The White House bid to raise taxes has been shut down. And as I vowed back in May—when everyone thought I was crazy for saying it—every dollar of debt-limit increase will be matched by more than a dollar of spending cuts. And in doing this, we’ve stopping a job-killing national default that none of us wanted.”

Boehner also emphasized that the deal requires each chamber to vote on a balanced-budget amendment to the Constitution. A two-thirds majority would be needed to send an amendment to the states for ratification.

One early resister to both Obama and Boehner was presidential candidate Michele Bachmann of Minnesota. “The ‘deal’ he announced spends too much and doesn’t cut enough,” Bachmann said in a statement Sunday night from the campaign trail. “Someone has to say no. I will.”

One of Bachmann’s competitors for the GOP presidential nomination, former Utah Gov. Jon Huntsman, took a different tack.

“While this framework is not my preferred outcome, it is a positive step toward cutting our nation’s crippling debt,” Huntsman said. “Because the legislation promises cuts commensurate with the debt-ceiling increase, forces a vote on a much-needed federal balanced-budget amendment, and provides the only avenue to avoid default, I encourage members of Congress to vote for this legislation."

Boehner’s success in wooing votes may hinge on whether his members believe him on taxes, or Obama. For opposite reasons, the same holds true for House Democratic leader Nancy Pelosi, whose liberal members are insisting that taxes be part of any ultimate solution.

“We all may not be able to support it, or none of us may be able to support it,” Pelosi said Sunday. “But we’re open to what comes down because… the stakes are very high here.”

First reaction from liberals was negative. “This deal trades people’s livelihoods for the votes of a few unappeasable right-wing radicals, and I will not support it,” said Rep. Raul Grijalva of Arizona, chairman of the House Progressive Caucus.

Sen. Bernie Sanders, a Vermont independent who caucuses with Democrats, didn’t even support a more Democratic-friendly Reid debt proposal that the Senate rejected in a rare Sunday vote. Sanders said the Reid plan, due to pressure from Republicans, did not ask “the rich and large corporations” to contribute a cent to deficit reduction in the form of more taxes.

“I cannot support legislation like the Reid proposal which balances the budget on the backs of struggling Americans while not requiring one penny of sacrifice from the wealthiest people in our country,” Sanders said.

As congressional leaders prepared to pitch the plan to their members Monday, the big questions were how many Democrats would stick with their president and party, and whether there would be enough of them to offset potential no votes by Republicans. Tea Party-aligned lawmakers and fiscal conservatives inside the GOP forced the debate to the brink of a deadline by demanding concessions, and some do not believe harm would result from a default.