How did we get
to this point?

The raising of the debt ceiling is one of those peculiar features of the American political system, right up there with the Senate filibuster and the presidential Thanksgiving-turkey pardon. Every so often (89 times since 1939) Congress has had to vote to raise the debt limit, even though it already voted for the spending obligations that brought the country to the edge of its borrowing power. Usually, the vote is a formality following some posturing by the opposition party (see Sen. Barack Obama, 2006.)

But not this year. Congressional Republicans, fired with the tea party fervor that helped them reclaim the House last fall, see raising the $14.3 trillion limit as a Rubicon to be crossed only if Obama tosses billions in spending overboard. And they have refused to pair those cuts with a small proportion of higher tax revenue to help right the fiscal ship.

The Treasury Department says the country will reach its borrowing limit Aug. 2, leading to a default that Federal Reserve Chairman Ben Bernanke says would be a “calamity.”

What are the options on the table?

Three main paths forward have emerged. For weeks, Vice President Biden negotiated with Republicans on a deal to save more than $2 trillion over the next decade. There was tentative agreement on cutting farm subsidies, federal employee pensions and the budgets of most federal agencies, as well as at least some Pentagon cuts. The two sides agreed on slicing $100 billion from Medicaid and were negotiating cuts to Medicare — higher premiums for the wealthy, restrictions on the supplementary Medigap policies many seniors purchase, and cuts in payments to hospitals and other providers.

More recently, Obama met with House Speaker John A. Boehner (R-Ohio) to discuss a bigger deal — a “grand bargain” that would save $4 trillion. Obama was open to raising the Medicare eligibility age from 65 to 67 and cutting Social Security payments by recalculating cost-of-living increases.

But both of these deals foundered on House Republicans’ opposition to including increased revenue as roughly 20 percent of the mix. In the smaller deal, revenue would include ending oil and gas industry subsidies and the loophole that lets hedge-fund managers have their earnings taxed at the 15 percent capital-gains rate. The larger deal pushed by Obama would have also included a broader increase on taxes for the wealthy.

The third, and increasingly likely, option is a fallback proposed by Senate Republican leader Mitch McConnell (Ky.). Congress would allow Obama to raise the debt limit in three increments totaling $2.5 trillion. It would also vote on resolutions disapproving of the debt increases, letting Republicans formally blame the increases on Obama.

To get House Republicans behind the deal, McConnell and Senate Majority Leader Harry M. Reid (D-Nev.) are revising it to include $1.5 trillion in cuts to government agencies and a new bipartisan committee to produce a framework for long-term debt reduction. Obama signaled Friday that he could live with the McConnell-Reid fallback.

Why is the president so eager for
a ‘grand bargain’?

Perhaps the biggest surprise has been Obama’s quest for a historic debt-reduction agreement. This would involve unpopular cuts in Social Security and Medicare, possibly depriving congressional Democrats of the cudgel they were hoping to wield against the House Republicans’ plan to replace Medicare with a system of subsidies for private coverage. A “grand bargain” would mean settling for smaller tax increases on the wealthy than if Obama simply let the George W. Bush-era tax cuts expire at the end of 2012. And it could impede the economic recovery by ratcheting back government spending, thus reducing demand.

But as Obama sees it, the debt-ceiling crisis has offered an opportunity to fulfill his grand if nebulous campaign promise to get serious about attacking the nation’s fundamental problems. Being able to campaign on a major debt deal could outweigh giving up the chance to attack Republicans over Medicare. Settling now for a smaller tax increase on the wealthy would spare Obama a divisive fight over the Bush tax cuts. And getting the nation’s fiscal house in order could make it easier to win support for spending on education, research and infrastructure in a second term.

As for the economy, Obama seems to have adopted, at least to some degree, the Republican theory that businesses will invest more if they see Washington getting a handle on the debt. And a 10-year debt deal could be arranged so that few of the cuts went into effect immediately — there could even be some upfront stimulus included in the deal.

Who is calling
the shots on
the Republican side?

Unclear. Republicans’ lock-step unity against Obama on issues like the economic stimulus package and health-care reform has given way to disarray. Boehner, the chain-smoking House veteran from the Cincinnati suburbs, seemed genuinely interested in striking a historic deal. But standing in the way has been the House’s No. 2 Republican, Eric Cantor, the telegenic and ambitious Virginian who has turned himself into the tribune for the House’s conservative freshman class. Cantor also has strong ties with some of the industry sectors that could end up paying more in a big deal, such as hedge funds, private-equity firms and pharmaceutical companies.

This leaves McConnell, the legislative tactician from Kentucky who has been the proud enforcer of Republican intransigence against Obama but who has decided that holding fast now could lead to disaster. He has been admirably candid that this restraint is not without partisan calculation. Democrats, he said, “want to blame the economy on us, and the reason default is no better an idea today than when Newt Gingrich tried it in 1995 is that it destroys your brand.”

Where does the GOP’s anti-tax resistance come from?

Many liberals are aghast that Obama is offering up a deal that would cut deeply in return for only half as much in added revenue as recommended by last year’s fiscal commission. But even this deal is unacceptable to House Republicans. Obama’s gambit has served to clarify that the Republican priority is less closing the deficit, per se, than shrinking government and cutting taxes.

This singular focus has been several decades in the making. The Reagan Revolution was animated by “supply side” theory, but Ronald Reagan himself presided over several tax increases after his initial big cuts of 1981. He escaped GOP opprobrium, but George H.W. Bush caught his party’s ire when he signed a 1990 deficit-reduction deal with higher taxes. George W. Bush passed two big tax cuts, which nonpartisan budget experts now say were a major factor in today’s deficits.

But conservatives have said that the Bush tax cuts actually increased revenue. GOP candidates running last fall brought a new level of intensity to the tax-cutting cause, fusing it with the general conservative aversion toward Obama and with the widespread frustration over the weak economy. It seemed like a tough case to make — polls consistently show support for higher taxes on the wealthy, and tax revenue is at a 50-year low of less than 15 percent of GDP, well below its historic average of 18 percent.

This did nothing to cool the anti-tax ardor, which was blessed by Wall Street and business donors who swung sharply behind Republicans in 2010. It was also encouraged by GOP leaders such as McConnell and Boehner eager to reclaim congressional majorities. But some Republicans are regretting past anti-government rhetoric and second-guessing the decision to turn the debt-limit vote into the defining showdown.

“Maybe the debt ceiling was the wrong place to pick a fight, as it related to trying to get our country’s house in order,” Sen. Bob Corker (R-Tenn.) said Thursday. “Maybe that was the wrong place to do it.”