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Wonkbook: A three-part deal on the debt ceiling?

By Ezra Klein,

Mark Wilson GETTY IMAGES Senate Minority Leader Mitch McConnell listens to a question while addressing the media on the budget talks. We seem to be coming closer to a deal on the debt ceiling. It begins with the McConnell plan, in which the debt ceiling is raised three times between now and November, and each time, Republicans are able to offer a resolution of disapproval. Then it adds in $1.5 trillion in spending cuts harvested from the Biden talks. Then it creates a committee of 12 lawmakers charged with sending a deficit-reduction plan to Congress by the end of the year. Whatever they decide on would be protected from the filibuster and immune to amendments.

For Republicans, this plan is something close to the best of all possible worlds (sorry, but I do not consider a world in which "Cut, Cap, and Balance" passes to be a possible one): It's all spending cuts and no revenues. It's a little plan that denies the Obama administration the political and substantive benefits of a big plan. It's a multi-part plan -- which is more important than people realize -- that forces Democrats to take three hard votes between now and the election, and almost ensures that deficit reduction will be an issue in 2013 and beyond. It's a plan that smartly pockets more than a trillion dollars in spending cuts Democrats can sort-of accept and only then begins a grand bargain process, ensuring that if there's a grand bargain later, it will cut far deeper into the bone of Democratic priorities. If it passes, Republicans will have escaped these negotiations without making any significant political or policy concessions.

As for the Democrats? Well, it's a deal. No particular part of it is so objectionably that Harry Reid couldn't pass it if he tried. And it raises the debt ceiling. That's not a particularly rousing argument, but perhaps it will be enough.

Five in the morning

1) Congress is setting up votes on a $1.5 trillion debt limit deal, reports Zachary Goldfarb: "A bipartisan effort in the Senate to allow President Obama to raise the federal debt ceiling in exchange for about $1.5 trillion in spending cuts over 10 years gained momentum Sunday...Republican leaders will first push forward in the House and the Senate with a constitutional amendment to balance the federal budget. The measure is virtually certain to fail in the Senate, which will then take up the debt limit proposal by midweek. If that clears the Senate, the House is expected to revise the measure, adding a proposal to reduce the deficit by $1.5 trillion over 10 years -- savings that will come through cuts to domestic programs but not new tax revenue. The plan would also create a new congressional panel that would, by the end of the year, seek to come up with a way of reducing the deficit potentially by trillions."

2) The new Congressional panel would be able to fast-track cuts, report Alec MacGillis and Lori Montgomery: "Under the stopgap plan, Congress would allow Obama to raise the debt ceiling in three increments totalling $2.5 trillion over the next year. Each time, Congress would vote on a resolution of disapproval, allowing Republicans to blame the increases on Obama. To get backing from House Republicans, McConnell and Reid are adding $1.5 trillion in spending cuts. And they are drawing up the committee, with six lawmakers from each party, which would report by the end of the year. The committee would resemble the fiscal commission chaired last year by Alan Simpson and Erskine Bowles, minus presidential appointees...The panel will require only a simple majority to report a plan to Congress, it would be protected from Senate filibuster and it would not be subject to amendment."

Background reading: Keith Hennessey breaks down the cuts that the president and Congress have already agreed on.

3) Obama is picking Richard Cordray, not Elizabeth Warren, as the head consumer financial regulator, report Ylan Mui and Zachary Goldfarb: "President Obama will nominate former Ohio attorney general Richard Cordray to lead the new Consumer Financial Protection Bureau, sidestepping Harvard professor Elizabeth Warren, who envisioned the agency and spent the past year setting it up, the White House said Sunday. Cordray, who lost his bid for reelection in November, is already at the agency as director of enforcement. The bureau, which will police financial products such as credit cards and mortgages, will officially open its doors Thursday. 'Richard Cordray has spent his career advocating for middle class families,' Obama said in a statement. He also acknowledged Warren’s work and said she 'will continue to make a profound and positive difference for our country.'"

Real talk: Richard Cordray is just as likely to be filibustered as Elizabeth Warren. See Mike Konczal for more on that. But one benefit for the administration here is that Elizabeth Warren might well run for Senate in Massachusetts next year. See Bob Kuttner for more on that.

4) We haven't dealt with the bursting of the consumer spending bubble, writes David Leonhardt: "The Federal Reserve Bank of New York recently published a jarring report on what it calls discretionary service spending, a category that excludes housing, food and health care and includes restaurant meals, entertainment, education and even insurance. Going back decades, such spending had never fallen more than 3 percent per capita in a recession. In this slump, it is down almost 7 percent, and still has not really begun to recover...If you’re looking for one overarching explanation for the still-terrible job market, it is this great consumer bust. Business executives are only rational to hold back on hiring if they do not know when their customers will fully return. Consumers, for their part, are coping with a sharp loss of wealth and an uncertain future (and many have discovered that they don’t need to buy a new car or stove every few years). Both consumers and executives are easily frightened by the latest economic problem, be it rising gas prices or the debt-ceiling impasse."

5) The bond market hasn't started panicking yet, reports Neil Irwin: "In Washington, the debate over the debt ceiling is the stuff of heated arguments, high-stakes brinksmanship and warnings that the global economy is teetering on edge. Wall Street isn’t buying it. So far, at least, the bond investors who lend trillions of dollars to the U.S. government are keeping cool, confident that the ups and downs of debt talks are mere theatrics. It’s not that investors aren’t jittery; presidential news conferences and statements by Republican congressional leaders are being closely watched on trading floors in the world’s financial capitals. And if the major credit rating firms were to downgrade their AAA ratings on U.S. debt, as they have threatened to do, there could be nasty and hard-to-predict ripple effects through the financial system."

Dubstep interlude: James Blake plays "The Wilhelm Scream" on Late Night with Jimmy Fallon.

Got tips, additions, or comments? E-mail me.

Still to come: Economists disagree about whether tax hikes or spending cuts are worse for the economy; Medicaid advocates are getting ready for cuts to come; the National Labor Relations Board is set to implement its new union election rules; the House passed a bill blocking a lightbulb efficiency rule; and a human-powered helicopter..

Economy

Economists disagree over whether spending cuts or tax hikes are worse for the economy, reports Binyamin Appelbaum: "The dominant school of economic theory predicts that tax increases should be somewhat less painful to the nation’s economy. A $100 spending cut reduces economic activity by $100, while an equivalent tax hike will be paid partly from savings, so that spending is reduced by a smaller amount. Recent studies, however, have found the opposite: Countries that rely primarily on spending cuts tend to experience less economic pain in the short term. Moreover, in some cases, the cuts seem to spur faster growth. The monetary fund study reported that a 1 percent fiscal consolidation achieved primarily through tax increases reduced economic activity by 1.3 percent over two years, while an identical consolidation driven primarily by spending cuts reduced activity by 0.3 percent."

Republicans' balanced budget amendment would render Reagan's policies unconstitutional, reports David Rogers: "Republican congressional leaders still want a 10-year, $1.8 trillion cut from nondefense appropriations and have added a balanced-budget constitutional amendment that so restricts future tax legislation that even President Ronald Reagan might have opposed it in the 1980s. Indeed, much of the deficit-reduction legislation signed by Reagan would not qualify under the new tea-party-driven standards. And even the famed Reagan-Tip O’Neill Social Security compromise -- which raised payroll taxes -- passed the House in 1983 well short of the 290 votes that would be required under the constitutional amendments being promoted by the GOP."

The head of the World Bank says Obama is failing to lead on global trade, reports Howard Schneider: "World Bank President Robert Zoellick launched a blunt critique of the Obama administration’s trade policy Sunday and in a separate interview said the United States was failing to assert its natural leadership in the global economy. In an address to be delivered at a World Trade Organization meeting in Geneva on Monday, Zoellick cites the United States by name as 'dumbing down' the ongoing and largely stalled Doha round of world trade talks. He elaborated in an interview, saying he was concerned that none of the major trading nations are talking ambitiously about how to lower global trade barriers -- putting economic growth at risk, particularly for the less-developed countries on which the bank’s work focuses."

Republicans have lost the debt standoff, writes Ross Douthat: "It turns out that Republicans didn’t have a plan for transitioning from the early phase of a high-stakes political negotiation, when the goal is to draw stark lines and force the other side to move your way, to the late phase, in which the public relations battle becomes crucial and the goal is to make the other side seem unreasonable, intransigent and even a little bit insane. Winning the later phase doesn’t require making enormous compromises, or giving up the ground you’ve gained. But it requires at least the appearance of conciliation...For Republicans, this would have required one of two maneuvers: either modestly scaling back the size of the spending cuts they were seeking, or finding a few places in the tax code...where they could live with raising revenue by eliminating a tax break or capping a deduction."

A default would hurt everyone's ability to borrow, writes Ezra Klein: "If the federal government’s borrowing costs rise, so will everyone else’s. Mortgages rates will jump, car loans will be harder to come by, universities won’t be able to float bonds, cities won’t be able to fund themselves. Treasuries are supposed to set the rate of 'riskless return' -- the price of loaning someone money and knowing, with perfect certainty, that they’ll pay you back, with interest. So when lenders decide how much to charge, they start with the riskless rate and then add to it to cover the risk that you won’t pay them back, and the inconvenience of having to wait for you to pay them back. It’s a practice called benchmarking, and it’s everywhere: in your mortgage, your credit card, your car payments, the loan you took out to hire three new employees at your business."

The whole political system is in thrall to the banks, writes Paul Krugman: "Ever since the current economic crisis began, it has seemed that five words sum up the central principle of United States financial policy: go easy on the bankers. This principle was on display during the final months of the Bush administration, when a huge lifeline for the banks was made available with few strings attached. It was equally on display in the early months of the Obama administration, when President Obama reneged on his campaign pledge to 'change our bankruptcy laws to make it easier for families to stay in their homes.' And the principle is still operating right now, as federal officials press state attorneys general to accept a very modest settlement from banks that engaged in abusive mortgage practices."

Obama needs to take a stand for more jobs spending, reports E.J. Dionne: "State and local budgets all across the country are a shambles. Teachers, police, firefighters, librarians and other public servants are being laid off...President Obama knows this. 'As we’ve seen that federal support for states diminish, you’ve seen the biggest job losses in the public sector,' he said in his July 11 news conference. 'So my strong preference would be for us to figure out ways that we can continue to provide help across the board.' So why not do it? 'I’m operating within some political constraints here,' Obama explained, 'because whatever I do has to go through the House of Representatives.' Excuse me, Mr. President, but if you believe in this policy, why not propose it and fight for it? Leadership on jobs is your central job right now."

Adorable animals bossing other adorable animals around: A chihuahua herds sheep.

Health Care

Medicaid advocates are steeling themselves for cuts, reports Julian Pecquet: "Medicaid advocates remain worried that the state-federal program for low-income Americans remains on the chopping block as debt ceiling negotiations enter the final stretch. Congressional Democrats' on-again, off-again pledge to protect the program from drastic cuts is causing heartburn among advocates for the poor and state officials who worry about the lawmakers' commitment. In particular, the Democratic leadership has at times left out any mention of Medicaid when vowing to fight entitlement cuts...The source said Democratic staffers tell advocates that references to Medicare really include Medicaid as well, but that they want to keep their message simple."

A grand bargain on health care is possible, writes Stephen Parente: "First, eliminate the tax exemption for employer-provided health insurance. This reduces revenues by more than $250 billion a year -- 2.5 times more than the home mortgage deduction. It also creates a tax distortion by penalizing entrepreneurs in small businesses, who don’t have access to the same tax break...Second, make Medicare a defined contribution plan for everyone age 54 and younger today, and make the contribution equivalent to the Medicare expenditure baseline in 2022 (when it goes into effect). After that, the contribution should be pegged to general inflation plus half of the U.S. productivity rate in the three previous years...Finally, readjust four elements of Obama’s health reform law that fiscal conservatives who vote in 2012 care about."

Domestic Policy

The NLRB is starting hearings on its new union election policy, reports Melanie Trottman: "Business groups and labor unions will face off at a hearing Monday over a government proposal to streamline the process of union-organizing elections. The central point of dispute is whether workers who vote not to organize do so because they don't see the benefit or because of employer intimidation. The National Labor Relations Board, in the most significant change in the union-election rules in decades, has proposed measures that could cut to as few as 10 days the gap between when a union files to hold an organizing election, and when ballots are cast. The current median is 38 days. Business groups say the proposal would unfairly limit management's right to make a case against unionization. Unions say it would give employers...less time to improperly intimidate employees into saying no to representation."

Obama is lobbying for CEO investment in education, reports Stephanie Banchero: "President Barack Obama will meet with some of the nation's top CEOs Monday to prod them to invest more heavily in education initiatives, especially those he champions, such as high-quality teaching and early childhood programs. The meeting was organized to address what Mr. Obama calls a 'growing education crisis' that has seen U.S. students slip further behind their international counterparts at the same time schools are slashing budgets. The CEOs of AT&T Inc. and Time Warner Cable Inc. are among those scheduled to attend the meeting. Melody Barnes, the White House's Domestic Policy Chair, said corporations have played an integral role in education but, until now, there hasn't been 'reform-oriented leadership' in Washington to help coalesce the efforts."

Let people choose to increase the Social Security retirement age, writes Richard Thaler: "There is a simple, easy way to convert a portion of your wealth into a fairly priced, inflation-adjusted annuity. Simply delay when you start receiving Social Security benefits. Participants are first eligible to start claiming benefits at age 62. For those who wait, the monthly payments increase in an actuarially fair manner until age 70...The Social Security Administration could take some steps to encourage people to delay. First, change some confusing terminology. For historical reasons, Social Security labels an intermediate age between 62 and 70 as the 'Full (normal) Retirement Age.'...Benefits at that age are not 'full' and retiring at that age is not 'normal.' Research shows that the designation of a full retirement age can serve as an anchor that influences people’s choices."

Aviation interlude: The University of Maryland's human-powered helicopter.

Energy

A bill blocking a lightbulb efficiency rule passed the House, reports Ryan Tracy: "The U.S. House voted Friday to block a federal standard that would push many less-efficient light bulbs off the market starting in 2012. The measure, attached to a broader bill on energy spending, could prevent the Energy Department from implementing the efficiency standards during the budget year that begins in October. It will now be part of final negotiations between House and Senate lawmakers charged with negotiating a final energy spending bill. It faces resistance in the Democrat-controlled Senate, and the White House, which supports the efficiency standards, opposes the measure...Manufacturers oppose repealing the standard, saying they have made investments in preparation for it to take effect."

Shale natural gas doesn't deserve the flack it's getting, writes Michael Levi: "The New York Times quoted several people, for example, who suggest that shale gas will never make economic sense. But while it’s almost certainly true that current gas prices make little economic sense, most independent analysts agree that slightly higher gas prices would make extraction work just fine while preserving the social benefits of shale development...And, while some environmental advocates have argued prominently that shale gas is worse for climate change than coal, their numbers simply don’t add up. Analysts at the Department of Energy’s National Energy Technology Laboratory have found that, while shale is slightly worse for the climate than other domestic sources of natural gas, both are far superior to coal."

Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams.

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