On Wednesday, the Congressional Budget Office released its latest long-term budget outlook. As always, the scorekeepers offered up two scenarios: In the first, Congress does nothing, follows the laws currently on the books -- which means the tax cuts expire, the Medicare cuts from the 1997 Balanced Budget Act go into effect, and the Affordable Care Act is fully implemented -- and the debt stabilizes. In the second, Congress extends most of the tax cuts, ignores the Medicare cuts and repeals various cost controls in the Affordable Care Act. Debt, of course, explodes.

We have a congress problem, not a deficit problem. The deficit only explodes if the next few congresses vote to detonate it. Congress doesn't have to extend the Bush tax cuts without offering offsets, or put off the Medicare cuts without paying for them in other ways, or do the easy parts of the health-care law without doing the hard parts. The answer to this, however, is not a high-stakes negotiation over the debt ceiling, where one false move could bring down the American economy, but a much-strengthened version of PayGo, where deficit-increasing deviations from current policy need to be offset with spending cuts or tax increases elsewhere.

Politicians are constantly talking about the need to signal seriousness to the markets, but what could be more serious than saying that they will work from the baseline in which America's deficits are much more under control, and though they intend to change those policies, they do not intend to deviate from the manageable deficit path they've already agreed to? That must be preferable to saying that Congress chooses to believe it will vote to increase the deficit by trillions over the next 10 years, but that the market shouldn't worry as the two parties plan to stop the government from paying its bills and throw the financial system into chaos if the other party doesn't agree to the deficit-reduction strategies they prefer.

Five in the morning

1) The two parties are placing fresh demands on the debt-ceiling deal, report Rosalind Helderman and Lori Montgomery: "Congressional leaders from both parties made new and competing demands Wednesday in exchange for their votes to raise the nation’s debt limit...Top Senate Democrats, led by Majority Leader Harry M. Reid (Nev.), said they have told Vice President Biden, who is leading the talks, that any agreement on raising the legal borrowing limit must include an effort to boost the flagging economic recovery alongside deep spending cuts sought by Republicans...Conservative advocacy groups asked Republicans to sign a pledge saying that they vow to vote against an increase in the $14.3 trillion debt limit without sharp and immediate spending cuts, new caps on annual spending and an amendment to the Constitution that would require Congress to balance the budget."

2) And the negotiations themselves are getting testier, reports Damian Paletta: "The bipartisan deficit-reduction talks led by Vice President Joe Biden grew more contentious Wednesday as Democrats and Republicans became increasingly entrenched on key issues, people familiar with the matter said. Republicans are staunchly opposed to raising taxes, something Democrats believe must be part of any deficit-reduction plan. Many Democrats, meanwhile, oppose certain changes to entitlement programs like Medicare, but Republicans say these are the biggest drivers of the deficit and must be tackled...Some described the tension between the budget negotiators as expected, given they're working through some of the most controversial issues involved, and talks are due to wrap up soon. Others said the intensifying differences are adding complexity to the talks and portend difficult discussions ahead."

3) Jose Antonio Vargas writes about life as a successful journalist who's also an illegal immigrant: "It was an odd sort of dance: I was trying to stand out in a highly competitive newsroom, yet I was terrified that if I stood out too much, I’d invite unwanted scrutiny. I tried to compartmentalize my fears, distract myself by reporting on the lives of other people, but there was no escaping the central conflict in my life. Maintaining a deception for so long distorts your sense of self. You start wondering who you’ve become, and why. In April 2008, I was part of a Post team that won a Pulitzer Prize for the paper’s coverage of the Virginia Tech shootings a year earlier. Lolo died a year earlier, so it was Lola who called me the day of the announcement. The first thing she said was, 'Anong mangyayari kung malaman ng mga tao?' What will happen if people find out? I couldn’t say anything. After we got off the phone, I rushed to the bathroom on the fourth floor of the newsroom, sat down on the toilet and cried."

4) The CBO's latest deficit warning shows we have a Congress problem, not a deficit problem, writes Ezra Klein: "If Congress lets the Bush tax cuts expire or offsets their extension, implements the Affordable Care Act as scheduled and makes or offset the Medicare cuts prescribed by the 1997 Balanced Budget Act — a world that the CBO calls the 'extended baseline scenario' — the national debt will be totally manageable. If Congress passes laws extending the Bush tax cuts without offsetting the cost, repealing the Affordable Care Act and its cost controls and protecting doctors from Medicare cuts without making up the savings elsewhere — the 'alternative fiscal scenario' — the national debt will be totally out of control."

Download the full report: http://1.usa.gov/imkZrK

5) Obama has failed to tackle global warming seriously, writes Al Gore: "President Obama has thus far failed to use the bully pulpit to make the case for bold action on climate change. After successfully passing his green stimulus package, he did nothing to defend it when Congress decimated its funding. After the House passed cap and trade, he did little to make passage in the Senate a priority. Senate advocates -- including one Republican -- felt abandoned when the president made concessions to oil and coal companies without asking for anything in return. He has also called for a massive expansion of oil drilling in the United States, apparently in an effort to defuse criticism from those who argue speciously that 'drill, baby, drill' is the answer to our growing dependence on foreign oil."

Power pop interlude: Free Energy play "Bang Pop" live.

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

Still to come: The Senate's #2 Democrat is on board for a short-term debt limit increase; looking back, the fiscal commission offered liberals a better deal than they'd thought; patient advocates are upset about a new health care reform rule; a task force is aiming to fix state fiscal problems; the House approved a bill to expand offshore drilling; and just a good, no frills video of kittens being cute.


The Fed acknowledges the economy is slowing down, reports Neil Irwin: "The economic recovery is slowing and the outlook for next year has gotten worse, Federal Reserve Chairman Ben S. Bernanke said Wednesday, backing away from the view that the slowdown of the past few months was merely temporary. The central bank released new economic projections that showed weaker growth in both 2011 and 2012 than had been forecast just two months ago. Despite the slowdown, the Fed said it will end a program of buying vast sums of Treasury bonds at the end of June as scheduled and gave no sign it is contemplating new action. But Bernanke, whom markets turn to as a purveyor of economic wisdom, said the Fed had no solid answers as to why, two years into an economic recovery, growth keeps disappointing."

Dick Durbin is on board for a short-term debt limit hike, reports Meredith Shiner: "Sen. Dick Durbin, a leading Senate Democrat, said Tuesday that Congress should cut a short-term deal to raise the debt ceiling to stave off default while they hash out a longer-term plan on debt. Durbin said its a practical plan, considering the list of priorities held by each party. He called the first deal a 'down payment.' 'We’re just not going to be able to accomplish that by Aug. 2,' Durbin said of the goals. 'So if we can reach a down payment agreement, that gets us past the Aug. 2 [deadline], extends the debt ceiling, with an understanding that we’re going to go back and finish the work for $4 trillion debt sooner rather than later, I think that makes sense.'"

Christine Lagarde's past experience with economic crises isn't promising, report Howard Schneider and Anthony Faiola: "French Finance Minister Christine Lagarde interviews with the International Monetary Fund board on Thursday for the job of managing director. But last year, as a debt crisis in Greece unnerved markets and raised the possibility that the euro-zone currency union might not survive, Lagarde wasn’t so interested in the agency she now wants to command. As the United States and the IMF urged fast action on a program to help settle Greece’s problems before they became more expensive and riskier to the world economy, France -- through Lagarde -- argued that Europe could tend to itself, a position that consumed precious weeks resisting an IMF role in any rescue."

A group of Democratic Senators want to sack the Comptroller of the Currency, report Victoria McGrane and Alan Zibel: "On Tuesday, Acting Comptroller of the Currency John Walsh said regulators are in danger of going too far to curb risk-taking by big banks. Now, some Democratic senators are calling for his head. Three Senate Democrats - Jack Reed of Rhode Island, Carl Levin of Michigan and Jeff Merkley of Oregon - have publicly called for the White House to replace Mr. Walsh, a Republican, following his speech in London Tuesday. The lawmakers were particularly rankled by Mr. Walsh’s statements that bank capital requirements - the cushion banks hold against future losses -- are already 'exceedingly high' and that regulators should be cautious about much more they require the largest banks to hold, something foreign and U.S. regulators are now negotiating."

The White House is appointing a final member to a council evaluating systemic risk, reports Deborah Solomon: "The White House is considering S. Roy Woodall, a former Kentucky insurance commissioner, to fill an insurance slot on a new council charged with overseeing risk in the financial system, according to people familiar with the matter. If Mr. Woodall is nominated it could help quell growing concerns among lawmakers and insurers that the Financial Stability Oversight Council is operating without adequate insurance expertise. The FSOC, created by last year's Dodd-Frank financial law, is in the process of determining which non-bank financial firms pose a "systemic" risk to financial markets and should be subject to heightened regulatory and capital requirements."

Conservatives have already won the debt fight, writes Ezra Klein: "Liberals rejoiced when President Barack Obama dismissed his fiscal commission with a perfunctory pat on the back. They had taken to calling it 'the cat food commission' in honor of its proposed cuts to Social Security and Medicare...Conservatives, meanwhile, were outraged. Republican Representative Paul Ryan blasted the president for having ignored the commission’s recommendations...Both sides misjudged the playing field. In retrospect, it’s clear that the report produced by the commission, chaired by former Senator Alan Simpson and Democrat Erskine Bowles, was a much better deal than liberals are now likely to get. And the president’s rejection of the Simpson-Bowles report won’t, in the end, prove so vexing to conservatives after all. Instead, it will clear the way for a deal that conservatives will much prefer."

Adorable animals doing nothing in particular interlude: Just five kittens, doing their thing.

Health Care

Patient advocates are upset by the administration's latest insurer regulations, reports Amy Goldstein: "The Obama administration tinkered on Wednesday with recent rules that provide patients more clout in disputes with health insurers, altering the standards in ways that disappointed leading advocates for health-care consumers. The rules are intended to guarantee patients nationwide the same rights to appeal if their insurers do not cover care that they consider necessary. The federal standards, part of the 2010 law to overhaul the health-care system, replace a patchwork of separate state policies. The rules allow patients to protest to their health plans and, if that does not work, to take their complaints to an outside arbiter...In the version issued Wednesday, the grounds for a patient to protest an insurer’s decision are narrower than consumer groups have wanted."

Employers dropping health care due to the Affordable Care Act is a feature, not a bug, writes Matt Miller: "The whole GOP line about Democrats 'dumping' people into “government-run” care is preposterous. For starters, the exchanges offer choices from among competing private carriers. And most people will feel more 'liberated' than 'dumped.' The United States remains the only advanced nation in which individuals lack access to group health coverage (with affordable group rates and no bar for preexisting conditions) outside the employment setting. As a result, health-care 'job lock' afflicts millions, which is bad for entrepreneurship, worse for economic dynamism and awful for peace of mind. Whatever quarrels you may have with the Affordable Care Act, these insurance exchanges are a historic achievement."

Domestic Policy

A task force is targeting state fiscal woes, reports Michael Corkery: "Two veterans of past fiscal crises are launching a study of the problems facing U.S. states today. Former New York Lt. Gov. Richard Ravitch and former Federal Reserve Chairman Paul Volcker are serving as co-chairmen of a new task force that will examine issues such as health-care costs and municipal borrowing practices, according to a person familiar with the matter. The task force plans to study at least five states and produce a report in about a year. The goal is to provide the public with more information than is generally made available by state and local governments, the person said. While the improving economy has boosted revenues in some states, many governments still face rising long-term costs for pensions, health care and debt payments."

State withdrawals from the "Secure Communities" immigration program are dangerous, writes Peter Schuck: "The real issue for Secure Communities is deportation priorities. Serious crimes by immigrants, like serious crimes by citizens, are properly at the top of the list. According to the federal government, more than 85,000 deportable immigrants are already serving time for so-called Level 1 offenses, which include homicide, kidnapping and major drug offenses. Nevertheless, opponents rightly complain that too few of those being deported are the more serious criminals whom the program originally promised to remove. But deporting the right offenders requires precisely the kind of data-sharing with local law enforcement that Secure Communities makes possible."

Celebrities, they're just like us interlude: John Krasinski, Jason Segel, Emily Blunt, and Alison Brie crash a bachelorette party.


The House has approved an offshore drilling bill, reports Peter Kasperowicz: "The House on Wednesday night approved H.R. 2021, which would make it easier to obtain Environmental Protection Agency (EPA) drilling permits by requiring permitting decisions to be made within six months and easing certain environmental standards. The bill was approved in a 253-166 vote in which 23 Democrats joined all but two Republicans. Wednesday debate on the bill was marked by Democratic arguments that it would weaken air quality standards across the country. The bill would prevent the EPA from regulating emissions from vessels that service offshore drilling operations, a change that Democrats said prevents EPA regulation on what can be the predominant source of emissions."

A group of moderate Republicans want tougher fuel efficiency rules, reports Juliet Eilperin: " group of more than a dozen moderate Republicans, including four former Environmental Protection Agency administrators, urged President Obama in a letter Wednesday to set tough new standards to curb carbon emissions from cars and light trucks. The letter comes as the administration is debating what sort of greenhouse gas emission limits it should impose on vehicles that will be sold in the United States for the model years 2017 to 2025...The move would 'help relieve the United States from its dangerous dependence on oil,' wrote the group, which included former EPA administrators Russell Train, William Ruckelhaus, William K. Reilly and Christine Todd Whitman."

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