Debt ceiling: Game of chicken likely to result in deal

By JANE SASSEEN
Yahoo! News

Can they finally cut a deal?

With less than a month to go before the debt ceiling must be raised or Uncle Sam risks running out of money to pay his bills, President Barack Obama invited Congressional leaders to the White House on Thursday in a push to jumpstart stalled budget talks.

"We need to come together over the next two weeks to reach a deal that reduces the deficit and upholds the full faith and credit of the United States government and the credit of the American people," Obama said in a rare appearance at the White House briefing room Tuesday afternoon.

The question now is whether Obama and Speaker of the House John Boehner (R-Ohio) will be able to step up and come to an agreement, where months of painstaking negotiations by Vice President Joseph Biden and various other Congressional delegations have failed.

Obama's invitation follows two weeks in which the president and his Republican rivals in Congress have dug themselves ever deeper into seemingly irreconcilable positions over how to tackle the country's soaring deficit and rein in its massive debt.

Think of what's underway in Washington now as a high-stakes game of "chicken" in which each is ratcheting up the pressure in hopes of forcing the other side to blink first.

The two sides remain far apart: the GOP refuses to consider any tax increases as part of the efforts to trim the deficit. They simply want spending to be cut. The President, meanwhile, insists that along with spending cuts, any deal must also include an end to certain tax breaks, which would mean higher taxes for some wealthy individuals and corporations.

The deep impasse has led to growing pessimism in Washington that a broad deal can be struck. Instead, some have begun to suggest that a short-term agreement for limited spending cuts may be the only way to avert a government default, with negotiators continuing to work through the fall on a more comprehensive package.

But the president rejected that approach in his comments on Tuesday afternoon, telling reporters that he was against any short-term plans that would simply "kick the can down the road." Instead, he urged both sides to "leave their ultimatums at the door" and get serious about resolving the talks by early August.

Obama expressed optimism that they will succeed, adding that a "series of discussions" over the Fourth of July holiday weekend had produced some progress.

Boehner was quick to discount the president's remarks, however, saying in a statement that any new White House talks would prove to be "fruitless" if the president continued to push for tax increases.

Yet even as the rhetoric heats up, most observers believe the odds remain high that Obama and Boehner will pull off a deal, if only because neither wants to face the economic consequences and market fallout of refusing to come to terms.

"The dangers are just too great if they don't," Larry Sabato, the director of the Center for Politics at the University of Virginia.

Much of what's going on amounts to political posturing, the inevitable maneuvering that comes as each side seeks advantage as the end game in the debt talks approaches.

"This is the natural gamesmanship you end up with in a highly-polarized political system in which neither side trusts each other or is willing to seriously compromise," says Sabato.

So where do things stand now?

Administration officials say they must pass legislation by August 2^nd to raise the debt ceiling from its current level of $14.3 trillion or the government will be unable to meet its obligations. To get a bill to the President's desk by that date, they add, both sides must agree to the outlines of a deal by July 22^nd.

With time running out, Democratic leaders in the Senate cancelled much of their traditional break for the Fourth of July and called their members back to Washington on Tuesday to try to pound out a deal. But work in the Senate, where the Democrats hold a majority, will only go so far. The ultimate deal will have to be cut with Republicans who control the House of Representatives.

Boehner insists House Republicans won't agree to boost the debt ceiling without a plan to whack spending of some $2.4 trillion from the deficit. While the Administration has offered up roughly $1 trillion in cuts from domestic programs ranging from farm subsidies to college aid, the GOP continues to push for far steeper reductions in entitlements and other spending.

Obama and the Democrats are resisting cuts to popular programs like Social Security and Medicare; they also want to see more of any spending trimmed from the defense budget, rather than domestic programs.

In addition, they want to raise roughly $400 billion by ending tax breaks for wealthy individuals, as well as for oil companies, hedge funds and companies that use private jets. But rather than go along with those demands to boost tax revenues, Republicans forced a collapse in the debt negotiations two weeks ago.

Much of that is simply political theater: Both Obama and Boehner need to take maximalist positions in order to show their constituents how hard they are fighting for their priorities before they cut a deal.

"Neither side can cave in now, so this will go all the way up to late July or into August," says Anne Mathias, who follows budget and tax issues for the Washington Research Group. "Both sides need to continue to look entrenched for awhile."

What might a deal ultimately look like? Much depends, of course, on which side caves first, and farthest. But behind the noisy squabbling, the potential outlines are already starting to become clear.

Through nearly two months of negotiations led by Biden, Republicans had insisted that large cuts in defense spending remain off-limits. Yet in recent days, the Washington Post reports, they have signaled a willingness to whittle back the military's budget. Many of new House members elected last fall, fervent in their desire to go after waste and inefficiency, no longer view the military budget as untouchable.

"When we say everything is on the table, that's what we mean," Majority Whip Kevin McCarthy (R-Calif.), the No. 3 leader in the House, told the Post.

More cuts are also under consideration, including limits on spending for Medicare and changes that would leave federal employees with smaller pensions. And proposed revisions in how annual inflation adjustments are calculated could trim $300 billion from Social Security and other payments.

After all that, if Congress still can't come up with enough to shave $2.4 trillion out of the deficit, there's growing talk of a more draconian alternative: mandatory spending caps under which Congress would essentially vote to forcibly restrain itself.

Proposals are now floating around Congress that would lead to automatic spending cuts and set maximum limits on overall spending. In one proposed bill, spending would automatically drop from the current 24.7% of gross domestic product to 20.6% over a decade; if Congress couldn't agree on enough cuts, an automatic trigger would kick in and force nearly across-the-board cuts.

"It will be too politically difficult for Congress to agree on $2 trillion in cuts without tax hikes or entitlement reforms, so they will develop caps and triggers as an alternative," says Greg Valliere, chief political strategist for the Potomac Research Group. "That will get them off the hook—if their constituents get upset with the cutbacks, they can say 'the triggers made me do it'."

And while GOP leaders continue to tiptoe gingerly around the issue, they are starting to consider whittling back some particularly egregious tax breaks. Sen. John McCain (R-Aris.) conceded on Sunday that the final deal might include some "revenue raisers." That could mean an end to long criticized subsidies for ethanol, along with agricultural supports. Some tax breaks for oil and gas producers could also end up on the chopping block.

"There's no way imaginable Republicans will go along with increasing tax rates," says the University of Virginia's Sabato. "But closing tax loopholes? There's plenty they could do."

Ultimately, a deal will likely include a small amount of new revenues, limited cuts in entitlements like Social Security and Medicare, a modest Pentagon haircut, deep cuts to discretionary domestic spending -- and the mandatory triggers if spending doesn't drop significantly as a percentage of GDP.

While Obama is pushing for a deal by early August, others have argued that too much remains to be resolved in the time left. That's what's led to talk of a short-term deal, with negotiations continuing into the fall or even later. One possibility, as suggested by former President Bill Clinton over the weekend, is a "mini-deal" in which the two sides move ahead with the cuts already agreed upon, raise the debt ceiling and keep negotiating for a broader package.

"I hope they will make a mini-deal," Clinton said in an interview at the Aspen Ideas Festival, in which he argued that Obama should not "blink" as the talks go down to the wire. "There are some spending cuts they agree on... and (the President) can take those and (get) an extension of the debt ceiling for six or eight months."

As for the doomsday talk of default come August if they can't agree? Analyst Valliere argues that such a scenario remains unlikely. Instead, Treasury Secretary Timothy Geithner will juggle funds to pay Uncle Sam's most important bills first. The Chinese and other foreign holders of U.S. Treasury bonds will get paid, as will U.S. investors.

As the negotiations get down to the wire, don't be surprised if Geithner warns that he won't be able to pay Social Security recipients, U.S. soldiers or others who depend on Uncle Sam. While such a threat would increase the pressure on the GOP to cut a deal, that, too, is highly unlikely. They will get their checks as well.

For much of the rest of the government, however, the picture looks different. If the Treasury can't continue to borrow after August 2^nd, it could be face at least a partial shutdown. "Geithner wouldn't have enough to keep most of the government running, so a de facto shutdown, not default, seems the greater risk," says Valliere.

The only certainty: the negotiations—and the gamesmanship--will get very, very messy between now and then.

Jane Sasseen is the editor-in-chief of politics and opinion at Yahoo! News.