Obama wades into debt talks, says deal 'remains possible'

McClatchy NewspapersJune 27, 2011 

WASHINGTON — The White House said Monday that it believes it can still reach a "significant deal" to raise the federal debt ceiling and cut trillions of dollars from future federal budget deficits before the U.S. defaults on its loans.

The optimism came as President Barack Obama and Vice President Joe Biden met at the White House with Senate Majority Leader Harry Reid, D-Nev., days after Biden-led bipartisan talks collapsed with Republicans saying they won't accept tax increases.

Reid called the session with Obama and Biden "productive," adding that "Democrats and Republicans don't have to look hard to find common ground. They only have to be willing to admit it when we see it."

But Senate Minority Leader Mitch McConnell, R-Ky., in a speech on the Senate floor hours before his own White House meeting with Obama, urged Reid not to push for tax increases as part of the solution.

"They're already politically impossible, since Republicans oppose tax hikes and Democrats have already shown they won't raise taxes in a down economy either," McConnell said. "So let's start by taking both proposals off the table and focus on what can actually pass Congress and what will actually spur the private sector to create jobs."

That, McConnell said, means big spending cuts. "Understand that the big government policies of the past two years have got to change," McConnell said.

At the White House, spokesman Jay Carney said Obama believes a deal "remains possible.

"The president believes there are majorities in Congress for reasonable compromise that achieves this very important goal," Carney said.

Carney said the White House is looking for a "balanced approach," suggesting that a compromise must include raising some tax revenue, along with trims to entitlement programs and cutting both defense and non-defense spending. Without new tax revenues, he said, cuts to programs such as food safety and weather tracking would be too deep.

He cast the higher tax revenues the White House has identified — ending oil and gas subsidies and closing a loophole for owners of corporate jets — as "measures that benefit millionaires and billionaires."

Monday's meetings marked a new, crucial phase for the budget talks, which sputtered to a close last week when House Majority Leader Eric Cantor, R-Va., and Senate Minority Whip Jon Kyl quit, saying they wouldn't participate further because Democrats were pushing for higher taxes in any agreement. They suggested it was time for Obama to take part in the talks.

Carney insisted the Biden-led talks had produced some progress, and said that the presidential-level round began with Reid and Obama discussing parameters of the deficit and debt problem.

Few details emerged, and no word on when further talks might proceed.

Still, there was a sense among Capitol Hill leaders from both parties that there are decent prospects for common ground. Negotiators are working against a deadline: Treasury Secretary Timothy Geithner has warned that failing to increase the nation's debt ceiling by Aug. 2 risks a U.S. default on debts owed, which could convulse financial markets and stall an already shaky recovery.

"It's important that we not play chicken here, that we don't test the markets," Carney said.

There appear to be four major flashpoints: Taxes, defense, domestic spending and the length of an agreement. The outlook:

- Taxes. Republicans have ruled out tax rate increases, but not necessarily other forms of revenue-raising. Test votes recently on ending ethanol subsidies got strong Republican support. And two Republican senators voted with 48 Democrats and two independents on a test vote last month to end billions of dollars in tax breaks for the oil industry.

Democrats want to go further. Among their major proposals: Limiting tax deductions to people earning more than $500,000 a year.

McConnell objected, saying Monday that Democrats want "huge tax hikes on American job creators." He called such ideas "not serious...it is my hope that the president will take those off the table...so that we can have a serious discussion about our country's economic future."

- Defense. Republicans are wary of large reductions in military spending. But unsuccessful recent bids in the House of Representatives to dramatically restrict the U.S. mission in Libya, as well as a vote to put restrictions on U.S. involvement in Afghanistan, got strong support.

- Domestic spending. There's been talk of automatic caps on spending for popular programs like education, transportation, health and human services. Sen. Bob Corker, R-Tenn., leads an effort to reduce spending over 10 years by $7.6 trillion, by capping all spending at 20.6 percent of Gross Domestic product; current spending is around 24.7 percent of GDP. If spending exceeded the cap, automatic cuts would be imposed.

Some Republicans want a balanced budget amendment to the Constitution. "It's the only way I will ever vote to raise the debt ceiling," said Sen. Rand Paul, R-Ky.

The problem with automatic fixes, say many Democrats, is that domestic programs are sensitive to economic and social conditions. They have signaled they'll accept some cuts in Medicare, the health care program for the elderly, and Medicaid, the federal-state health program for the poor.

"We can find savings in Medicare and Medicaid without hurting people," said Sen. Charles Schumer, D-N.Y.

- Length. Some Republican leaders have floated the idea of a short-term debt limit, perhaps through the end of this year, to make agreement easier. But lawmakers from both parties are cool to the proposal. "We want to avoid a shorter-term debt limit at all costs. It could very well rattle the markets," Schumer said.

Carney said both parties want an agreement: "It's in everyone's interest."

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McClatchy Newspapers 2011

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