(Jonathan Ernst/GETTY IMAGES)

Consider how far they've come: The Obama administration has agreed to a debt-ceiling deal that's 83% spending cuts and 17% tax increases -- mere inches away from the magic 83:15 ratio that the Republicans on the Joint Economic Committee asked for back in March.

The Obama administration has functionally agreed to redefine a "grand bargain" as a deal that trades lots of spending cuts and some entitlement reforms for a small number of tax increases. And as the taxes go up, so will the ambition of the entitlement reforms. In today's New York Times, Robert Pear reports that the "Obama administration officials are offering to cut tens of billions of dollars from Medicare and Medicaid in negotiations to reduce the federal budget deficit, but the depth of the cuts depends on whether Republicans are willing to accept any increases in tax revenues."

The Democrats have agreed to limit tax increases to cuts in "tax expenditures" -- a category that no less eminent a Republican economist than Alan Greenspan says should properly be understood as "government spending" rather than "tax cuts" -- rather than the marginal-rate increases that Republican economists say are truly harmful to growth. That's given Republicans an out, if they want it: They can say they're cleaning the code rather than raising taxes.

But there's little evidence, at least as of yet, that Republicans are going to take the deal -- or even that they can take the deal. That raises the question of whether they've gotten here by being savvy, tough negotiators, or whether the reason they keep saying "no" is that they've lost the ability to say "yes." As David Brooks writes today, "If the debt ceiling talks fail, independents voters will see that Democrats were willing to compromise but Republicans were not. If responsible Republicans don’t take control, independents will conclude that Republican fanaticism caused this default. They will conclude that Republicans are not fit to govern. And they will be right."

Five in the morning

1) The administration is entertaining Medicare/Medicaid cuts as part of a debt deal, reports Robert Pear: "Obama administration officials are offering to cut tens of billions of dollars from Medicare and Medicaid in negotiations to reduce the federal budget deficit, but the depth of the cuts depends on whether Republicans are willing to accept any increases in tax revenues. Administration officials and Republican negotiators say the money can be taken from health care providers like hospitals and nursing homes without directly imposing new costs on needy beneficiaries or radically restructuring either program. Before the talks led by Vice President Joseph R. Biden Jr. broke off 12 days ago, negotiators said, they had reached substantial agreement on many cuts in the growth of Medicare, which provides care to people 65 and older, and Medicaid, which covers lower-income people."

2) These cuts could shred previous deals between the administration and the health care industry, reports David Nather: "Last year, health care industry groups gave President Barack Obama’s reform plan the support it needed to become law. Now, those same groups are sweating over what might happen in the debt ceiling talks -- because their fortunes might be about to change. Critics of the reform often attack it as a collection of 'backroom health care deals,' and Democrats did have an easier time passing it because powerful groups -- like hospitals and the drug industry -- endorsed the legislation...Some of them did get rewarded for their help...But no 'deal' lasts forever, and now the groups that supported the reform law are keeping a nervous eye on what health care savings might become part of an agreement to raise the debt ceiling."

3) The Republican Party's aversion to a deficit compromise suggests they may no longer be 'a normal party,' writes David Brooks: "We can have no confidence that the Republicans will seize this opportunity. That’s because the Republican Party may no longer be a normal party. Over the past few years, it has been infected by a faction that is more of a psychological protest than a practical, governing alternative. The members of this movement do not accept the logic of compromise, no matter how sweet the terms. If you ask them to raise taxes by an inch in order to cut government by a foot, they will say no. If you ask them to raise taxes by an inch to cut government by a yard, they will still say no. The members of this movement do not accept the legitimacy of scholars and intellectual authorities. A thousand impartial experts may tell them that a default on the debt would have calamitous effects, far worse than raising tax revenues a bit. But the members of this movement refuse to believe it."

4) Neil Irwin lists five ways to tell if Washington's bickering is freaking out the bonds markets. Here's one that's already worrying close observers: "Spikes in the credit default swaps market. You can buy insurance against the U.S. government or almost any other borrower defaulting on its obligations, through credit default swaps. The price of those swaps rises as a default appears more likely, making the insurance more expensive. Greek credit default swaps, for example, are trading at prices that imply an 85 percent probability the country will default within five years. U.S. swaps imply only a 4.6 percent chance of a default within five years. This is the indicator that is flashing warning signs — it is up substantially since early April."

5) The 112th Congress is underperforming the "do-nothing" Congress of 1948, reports Kathleen Hennessey: "The 112th Congress is on pace to be one of the least productive in recent memory — as measured by votes taken, bills made into laws, nominees approved. By most of those metrics, this crowd is underperforming even the 'do-nothing Congress' of 1948, as Harry Truman dubbed it. The hot-temper era of Clinton impeachment in the 1990s saw more bills become law. There is no shortage of explanations for the apparent lack of legislative success. Political observers see hyperpartisanship and perpetual campaigning that makes once-routine steps politically perilous. Experts cite the rise of a brand of conservatism that aims for a government that governs least. Historians note that it's not unusual for Congress to take a breather after a period of hyperactivity like the one Washington completed last year...Perhaps the only group seeing a bright side is the Democratic minority in the House, which supports virtually none of the bills voted on in that chamber but doesn't have to worry about them ever becoming law."

Happy Fourth interlude: The NYPD ignites its stash of illegal fireworks.

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

Still to come: Corporate profits are strong even as a the economy stalls; Christina Romer vs. austerity; Elizabeth Warren is unconfirmed, but in charge; premiums for health care reform's high-risk plans are declining; "super PACs" could play a big role in next year's elections; the administration's new vehicle emissions rules are set to be released soon; and a seal tries to sleep, loudly.


Even as the economy sputters, corporate profits remain strong, report James Hagerty and Jon Hilsenrath: "While the U.S. economy staggers through one of its slowest recoveries since the Great Depression, American companies are poised to report strong earnings for the second quarter--exposing a dichotomy between corporate performance and the overall health of the economy...A range of indicators show that the economic recovery has been the worst, or one of the worst, since the government began tracking such data after World War II: Unemployment is too high, bank lending necessary to spur spending is too low, home prices are depressed...Many economists predict the sluggish rebound may continue for years. Against this backdrop, many U.S. companies are expecting to report surprisingly robust profits."

Without an actual appointment, Elizabeth Warren is still shaping the Consumer Financial Protection Bureau, reports Edward Wyatt: "It is conventional wisdom in this town that the first director of the new Consumer Financial Protection Bureau will be anyone but Elizabeth Warren. She claims not to care. Ms. Warren, who pushed for the creation of the bureau, has waged a tireless campaign on its behalf. In doing so, she may have helped her own prospects for getting the job. In nine months overseeing the bureau’s start-up, she has talked with community bankers in every state, conferred with about 70 members of Congress, conducted dozens of media interviews and met with more than 1,000 banking, business and consumer representatives. Preparing for the agency’s July 21 opening, she supervised the hiring of more than 300 people."

Obama has nominated Thomas Curry to be the new Comptroller of the currency, reports Binyamin Appelbaum: "President Obama announced Friday that he would nominate Thomas J. Curry to lead the Office of the Comptroller of the Currency, which oversees hundreds of national banks, including the giants Bank of America, JPMorgan Chase and Wells Fargo. Mr. Curry, a longtime state banking regulator in Massachusetts, has served for the last seven years as one of the five directors of the Federal Deposit Insurance Corporation...Mr. Curry’s nomination responds to the demands of Senate Democrats that the White House replace the acting head of the comptroller’s office, John G. Walsh, whom they regard as obstructing key aspects of the law passed last year to overhaul financial regulation."

Not all austerity is created equal, but it's all ill-advised, writes Christina Romer: "Wealthier households typically pay for more of a tax increase out of savings, and so they reduce their spending less than ordinary households. This implies that tax increases on wealthy households probably have less effect on the economy than those on the poor or the middle class. All of this argues against any form of fiscal austerity just now. Even some deficit hawks warn that immediate tax increases or spending cuts could push the economy back into recession. Far better to pass a plan that phases in spending cuts or tax increases over time. But if federal policy makers do decide to reduce the deficit immediately, reducing spending alone would probably be the most damaging to the recovery. Raising taxes for the wealthy would be least likely to reduce overall demand and raise unemployment."

A corporate repatriation holiday won't solve anything, writes Paul Krugman: "U.S. corporations are supposed to pay taxes on the profits of their overseas subsidiaries -- but only when those profits are transferred back to the parent company. Now there’s a move afoot...to offer an amnesty under which companies could move funds back while paying hardly any taxes. And even some Democrats are supporting this idea, claiming that it would create jobs. As opponents of this plan point out, we’ve already seen this movie: A similar tax holiday was offered in 2004, with a similar sales pitch. And it was a total failure. Companies did indeed take advantage of the amnesty to move a lot of money back to the United States. But they used that money to pay dividends, pay down debt, buy up other companies, buy back their own stock -- pretty much everything except increasing investment and creating jobs."

My column: California's present could be America's future: "During last year’s election, Californians passed Proposition 25, permitting the budget to pass on a simple majority vote and docking the legislators’ pay if they procrastinated. But they preserved the two-thirds majority required for taxes. As you might expect, the budget passed by the deadline, but it focused almost entirely on cuts. 'Proposition 25 is why we have an on-time budget,' sighs Jean Ross, California Budget Project director. 'The bad news is that the legislature still has one hand tied behind its back. It can cut, but it cannot tax. It’s a very destabilizing position to be in.'...That’s not how you win the future. But it’s almost exactly the budget process Republicans want to bring to Washington."

Adorable animals snoring interlude: A seal tries to sleep, loudly.

Health Care

The administration is cutting premiums for high risk plans, reports Michelle Andrews: "Uninsured sick people got some good news recently, or some of them did, anyway. Starting July 1, the Obama administration reduced the premiums by up to 40 percent in special high-risk insurance plans that the federal government is running in 17 states and the District. These preexisting condition insurance plans, or PCIPs, were created under the 2010 health-care overhaul to provide guaranteed coverage to people who have medical conditions that often make them uninsurable in the individual insurance market. On the low end, Mississippi will reduce premiums by 2 percent. Several states will cut monthly rates in the 15 to 25 percent range, including the District , which will reduce premiums by 18 percent. Six states, including Virginia, will reduce their premiums by 40 percent."

Domestic Policy

"Super PACs" are ready to go for 2012, reports Dan Eggen: "One commercial accuses the president of worsening the deficit and says, 'It’s time to take away Obama’s blank check.' Another attacks Republican tax and Medicare policies, saying, 'We can’t rebuild America if they tear down the middle class.' So begins the shadow campaign of 2012, in which a new breed of 'super PACs' and other independent groups are poised to spend more money than ever to sway federal elections...The rise of these independent groups, which can raise unlimited amounts of money from corporations, unions and other wealthy donors and spend it to help their favored candidates, could end up defining the 2012 campaign. But some of the groups could also pose a threat to established campaigns, which may find it difficult to stop them from wandering off message or committing strategic blunders."

The NEA is endorsing Obama again, reports Michael Alison Chandler: "The governing body for the National Education Association voted Monday to endorse President Obama for reelection in 2012, handing him an early campaign boost despite widespread dissatisfaction among teachers about federal education policies. Dennis Van Roekel, president of the 3.2-million-member union, said in a statement that Obama shares the group’s vision for America. 'He has never wavered from talking about the importance of education or his dedication to a vibrant middle class,' he said...In the days leading up to Monday’s vote, many of the 9,000 educators at the union’s annual convention in Chicago said they were unhappy about the president’s promotion of charter schools and accountability policies that they say unfairly penalize teachers."

The FCC's staffing changes are spurring more lobbying over the AT&T/T-Mobile merger, reports Cecilia Kang: "As the Federal Communications Commission reviews AT&T’s $39 billion bid for T-Mobile, major staff changes at the agency are creating uncertainties about when and how the commission will vote, experts say. One Republican-held chair is open on the five-member commission now that Meredith Attwell Baker has resigned to take a position at cable giant Comcast. Democratic Commissioner Michael J. Copps will leave later this year-- months before the agency’s review of the deal is expected to be complete. The staff changes, as well as growing opposition by state utilities and competitors such as Leap Wireless and Sprint Nextel, have spurred intense lobbying over the deal."

'90s nostalgia interlude: Alanis Morisette plays "You Oughta Know" live.


The administration is unveiling new emissions-cutting vehicle rules, reports Juliet Eilperin: "Heather Zichal, deputy assistant to the president for energy and climate-change policy, makes a forceful case for the need to slash greenhouse-gas emissions and boost the efficiency of cars and small trucks: The moves will cut America’s oil consumption, foster the nation’s energy independence, save consumers money at the pump and help revive domestic auto manufacturers. What she doesn’t volunteer is that they will curb climate change. The Obama administration is crafting two regulations -- one targeting passenger vehicles, the other focused on heavier trucks and buses -- that would do more to cut global-warming pollution than any other policy in the president’s time in office. But that fact is barely mentioned as officials negotiate with automakers, environmentalists and others."

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