Bloomberg News

Obama, Republicans Focus on Narrower Deal as Deadline Nears

June 28, 2011

(Updates with remarks by Carney, meeting with Senate Democratic leaders in second-fourth paragraphs.)

June 28 (Bloomberg) -- President Barack Obama and Republicans are narrowing the debate on a deficit-cutting plan to a reduction of $1 trillion to $2 trillion, though whether that would settle the issue through the 2012 presidential election remains in doubt, according to budget and debt experts.

White House press secretary Jay Carney said today that Obama will continue the deficit talks with Senate Democratic leaders tomorrow at the White House. Carney declined to say whether the president has scheduled any more meetings with Republicans following his discussion yesterday with Senate minority leader Mitch McConnell of Kentucky.

“We continue to consult with congressional leaders,” he told reporters aboard Air Force One accompanying the president to Iowa.

Carney repeated that Obama believes a “significant” deal is possible even as Republicans and Democrats show little signs of compromise on entitlements and taxes. Republicans are holding firm in their demand for spending cuts in excess of what is needed to raise the government’s credit limit.

The clock is ticking closer to Aug. 2 -- the date when, the Treasury Department estimates, the U.S. risks a default on its debt obligations unless Congress increases the $14.3 trillion debt ceiling.

Size of Agreement

“We’re going to get a small package and pray that it gets us past the election,” said Andy Stern, a Democrat and former president of the Service Employees International Union who served last year on Obama’s bipartisan commission that studied ways to reduce the federal debt.

After last week’s collapse of a bipartisan effort, led by Vice President Joe Biden, aimed at brokering a multitrillion- dollar deal, Obama engaged directly in talks with Republicans yesterday by meeting for more than an hour with McConnell. Neither side provided details of the discussion.

“The big boys are doing the negotiating now,” said Marc Goldwein, former associate director of the debt commission.

“Even if they wanted a $4 trillion deal, there isn’t time in a two- to three-week period to write it legislatively,” said Goldwein, now policy director at the Committee for a Responsible Federal Budget, a Washington-based organization that examines fiscal policy. “The important thing is the biggest down payment as possible with at least a symbolic first step on entitlements.”

No Short-Term Deal

White House officials and most Republicans are insisting that they don’t want a short-term agreement, which would force Congress to revisit the debt-ceiling issue later this year or next year as the narrative in Washington shifts toward the 2012 presidential election.

Even so, they are underscoring their opposition to compromise on the biggest drivers of the long-term debt. Yesterday McConnell declared tax increases “politically impossible” and said, “If government spending was the answer to an economic slowdown, we’d be in a boom right now.”

Democrats are holding fast on the tax issue, at least for now. “You have to have revenue on the table, and you have to make cuts,” House Minority Leader Nancy Pelosi of California said June 26 on CNN’s “State of the Union.” Going into default, is “very bad for the economy, and I hope their friends on Wall Street will tell them that.”

Democrats also insist that significant revisions to Medicare and Social Security are off the table.

‘At an Impasse’

“The two parties really are at an impasse,” said Rudolph G. Penner, a senior fellow at the Urban Institute in Washington and a former director of the Congressional Budget Office.

“Markets should already be very concerned about where we’re going even if we do have some temporary resolution of the debt ceiling,” he said. “I don’t see it being repaired without a crisis.”

To avoid a short-term increase, the two sides will either need to find $2 trillion in savings or sign off on a smaller package that includes some sort of a budget enforcement mechanism instituting automatic spending cuts and tax increases, said John Spratt, a former Democratic House member from South Carolina who was chairman of the House Budget Committee and also served on Obama’s debt commission.

Discretionary Spending Cuts

The backbone of a debt deal includes discretionary spending cuts, which the Bipartisan Policy Center in Washington estimates could total $600 billion over 10 years, including spending on foreign aid. Cutting so-called mandatory spending outside of health care, such as agricultural subsidies, could save an additional $100 billion over 10 years, according to estimates by the center, a policy research group founded by former Senate majority leaders from both parties.

That’s where the hard part comes in, with the two parties forced to decide whether and how much to trade on Medicare and tax increases and Pentagon spending cuts.

Making changes to Medicare, such as asking the wealthy to pay a higher price for their premiums, is one idea that has been raised. Democrats have long opposed such a change, arguing it would undermine popular support for the government-run health care program for the elderly.

Still, there are signs they may be softening, with prominent Democrats like Senator Dick Durbin of Illinois, who holds the party’s No. 2 position in the chamber, saying the issue needs to be on the table.

Inflation Calculations

Among the recommendations of Obama’s debt commission was a change in the way the government calculates the rate of inflation, resulting in lower cost-of-living increases and other entitlement benefits. The so-called chained consumer price index, an alternative measurement for the Consumer Price Index, reflects the effect of substitution that consumers make across categories of goods and items in response to changes in relative prices. A switch to that method could save about $300 billion over the next decade, according to an analysis by the Center for a Responsible Federal Budget.

While such a plan has drawn stiff opposition from House Democrats, who say it amounts to a benefit cut for current beneficiaries, it has been on the table both as part of the Biden talks and among a bipartisan group of senators -- known as the Gang of Six -- working on a long-term debt plan.

Finally, an area ripe for cutbacks is the Pentagon budget, said David Walker, who served as U.S. comptroller general from 1998 to 2008 under Democrat Bill Clinton and Republican George W. Bush.

‘Huge Waste’

“There’s huge waste in defense,” he said, “and both sides have targeted some defense cuts.”

In January, Defense Secretary Robert Gates proposed a five- year spending plan with $78 billion of net savings from canceling some weapons programs, reducing troop numbers and cutting overhead. Republicans backed Gates’s goal in a budget plan that passed the House in April.

The most contentious issue of all may be taxes.

As part of his proposed budget for fiscal year 2012 released Feb. 14, Obama proposed $357 billion in revenue- raisers, which would include ending subsidies to oil and gas companies -- a proposal that failed last month in the Senate. Republicans need to “take on some of their sacred cows,” Carney said yesterday.

The White House would also tax private-equity or hedge fund managers at higher income-tax rates instead of lower capital- gains rates, change the depreciation formula on corporate jets and limit itemized deductions for wealthy taxpayers.

It also proposed repealing a tax benefit for an inventory accounting practice used by many manufacturers and retailers, which the CBO estimates would be worth $72 billion by 2016.

Republican Hesitation

Cutting a deal on taxes would involve a break with Grover Norquist, the head of the anti-tax advocacy group Americans for Tax Reform, who insists that any elimination of tax breaks must be accompanied by an equal reduction in taxes elsewhere.

“The real problem, from my standpoint, is the Republicans hesitating to do anything on the revenue side, even if it’s trying to target tax expenditures,” Walker said.

House Speaker John Boehner, an Ohio Republican, may soon come to the realization that he needs Democrats to get any debt- ceiling bill through a Democratic-controlled Senate and signed by a Democratic president, even as the Tea Party caucus threatens to vote against a debt-ceiling increase unless he delivers a spending-cut-only accord.

“He’s got to get a majority of the Republican caucus,” Walker said. “He doesn’t have to get a majority of the Tea Party caucus.”

--With assistance from Hans Nichols in Bettendorf, Iowa. Editors: Leslie Hoffecker, Joe Sobczyk

To contact the reporters on this story: Heidi Przybyla in Washington at hprzybyla@bloomberg.net; Margaret Talev in Washington at mtalev@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net


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