One of the more depressing and outrageous revelations of the massive Wall Street scandal was the news that the previously Olympian ratings agencies, Moody's and Standard & Poor's, were incompetent at best; at worst, they were in bed with the investment banks whose bonds they were supposed to be evaluating. Both agencies, for example, bestowed AAA ratings the highest possible on laughably flimsy mortgage-backed bond contraptions, whose demise almost sank the global economy. In an actual market, no one would trust these fools to rate anything anymore; new, untainted agencies would be born to replace them. But on Wall Street, no one ever has to say they're sorry.
So it was rich to watch Standard & Poor's venturing ever so boldly into the world of politics, issuing a warning about the future solvency of the U.S. government if a long-term deficit-reduction deal isn't achieved. S&P was once again reflecting the views of its corporate clients, who are worried about the looming debt-ceiling fight but also don't like President Obama's financial reforms or his recently restated desire to return tax rates for the wealthy to the fearfully modest levels established by Bill Clinton in the 1990s. Stocks dipped on the S&P warning, but the bond market was unmoved, and so was the Obama Administration.
The timing of the warning was both curious and ironic: despite all the usual political bleating, we seem to have finally stumbled upon a real discussion of our long-term deficit problems. Actual proposals are being made; actual negotiations are taking place. We have Congressman Paul Ryan to thank for this. His proposed deficit solution, as ridiculously unbalanced and unfair as it was, was the first official Republican acknowledgment in a long time that merely cutting "wasteful" discretionary spending won't be enough to influence the long-term deficit, and that the problem isn't just Obama-related. "Ryan put previously untouchable things like entitlements and farm subsidies on the table," an Administration official told me, "which was a real public service." (Ryan also, tacitly, endorsed many of the Medicare cuts included in Obama's health reform act last year.)
Ryan's plan and Obama's response set the parameters for the negotiations now taking place in the Senate among the so-called Gang of Six, equally divided between Republicans and Democrats, who are hoping to come up with an actionable version of the findings of the President's Deficit Reduction Commission. I spoke with several of these Senators and was shocked and depressed to learn that none of them would gossip about the specifics of what they were up to. They did describe the process, though, and even characterized their silence: it means they're doing serious work. There have been "dozens and dozens of meetings," one Senator told me, with the Senate Budget Committee staff adding hundreds of hours to the process. "They want to be able to present a comprehensive deal when they return the first week of May," a staffer said. Agreement hasn't been reached on everything, and the negotiations have been difficult sometimes apparent deals on specific items evaporate and have to be renegotiated but there is real optimism that consensus can be attained. "I've been around here for 25 years," Senator Kent Conrad of North Dakota told me, "but I've never been involved in a bipartisan budget negotiation of this magnitude and significance before."
The broad outlines of the deal are obvious. The centerpiece is tax reform. There will be lower rates and fewer loopholes. "The deficit commission used 80% of the savings [from closing loopholes] to lower rates," Conrad told me, "and 20% to reduce the deficit, which yields $1 trillion over 10 years." There will be reform of Social Security, Medicaid and Medicare, though not the draconian voucher system Ryan proposed. There will be military cuts. Conrad wouldn't be specific, but he said, "We asked the Pentagon how many private contractors they had. The reply was, 'Somewhere between 1 and 9 million.' "
Can this work? It depends on the tax-allergic Republicans, especially the Tea Party caucus in the House. Gang member Saxby Chambliss of Georgia has been informally keeping House Speaker John Boehner up to date on the negotiations and, perhaps, conveying Boehner's feedback to the Gang of Six. "It's been an emotional roller coaster," Senator Mark Warner of Virginia, another member of the Gang, told me. "But can you imagine what it would do for the nation's psyche if we can actually make this happen? It would show that our institutions have the ability to solve big problems, that it doesn't always have to be the Gunfight at the O.K. Corral." We may be a long way from Warner's dream but perhaps not so far as S&P believes.