For all the sniping and posturing in Washington Republicans walking out of bipartisan negotiations, President Obama accusing them of carrying water for the corporate-jet set the two sides are likely to work out a deal to raise the debt limit and avoid a catastrophic default. Even though many Republicans are insisting they won't accept any tax increases and many Democrats are insisting they won't accept any Medicare cuts, the deal is likely to include both. And Congress will probably approve it.
But with the fate of the global economy depending on a deal, "definitely" would be preferable to "probably."
Traditionally, raising the debt ceiling has been a formality, a chance for the out-of-power party to complain about red ink before borrowing proceeds as usual. But after their midterm victories, Republicans saw the $14.3 trillion ceiling as a perfect bargaining chip to force drastic spending cuts. They also saw a chance to set a political trap for Obama, daring him to make a public push for more debt and fewer cuts.
The President was leery of short-term austerity measures that could hurt an already tepid recovery. But after the midterms, he couldn't ensure that the U.S. could pay its bills without GOP votes. And some Obama aides sensed the possibility of a "grand bargain" that could chart a more sustainable long-term fiscal course and perhaps even bolster the economy by boosting long-term confidence. Republicans and Democrats did hash out a major tax-cut deal in December, followed by a modest spending-cut deal that avoided a government shutdown in April.
The debt-limit talks have produced genuine progress toward deficit reduction. The two sides have identified $1.7 trillion to $2.3 trillion in potential spending cuts over a decade, including trims to farm subsidies and the Pentagon, plus increased pension contributions from federal workers. Democrats have resisted the GOP's push to slice Medicare and Medicaid but have agreed to accept deep spending cuts as long as Republicans accept some tax hikes for the wealthy.
Democrats proposed to slash $400 billion worth of tax breaks for oil companies, hedge-fund managers and owners of private jets, yachts and racehorses. They also want to cap deductions for families making over $250,000 a year and eliminate a heads-I-win-tails-the-government-loses corporate tax loophole called LIFO. Republicans at first said, No way, no new taxes or else no deal. Then they cleverly upped the ante, telling Obama they would agree to closing some loopholes only if the money saved by doing so was offset by new tax cuts.
Republicans are betting that the White House will cave; voters are tired of spending and debt, and Obama doesn't want a double-dip recession on his watch. Obama and other Democrats tried to argue that if there is an economically devastating default which, incidentally, would increase the deficit by raising borrowing costs and depressing revenue Republicans will take the blame.
That's where things stood when Obama called both sides to the White House for talks July 7, saying, "It's my hope that everybody is going to leave their ultimatums at the door."
The outlines of a deal are already forming: a few Medicare cuts that Democrats can stomach, a few tax hikes Republicans can claim are not really tax hikes, some short-term tax cuts to provide a little stimulative kick and a slew of gimmicks to make the numbers work for everyone. It will take votes of both Republicans and Democrats to pass, because the final deal is likely to anger both parties' bases. But a deal would enable Obama to look bipartisan and Republicans to cut spending. Sanity would be restored, at least temporarily. And sanity always prevails in Washington, right?