The deficit ceiling debate took an interesting turn as Obama is considering going forward with House Speaker Boehner on a $3 trillion deficit reduction deal that does not include immediate tax hikes. Democrats responded angrily, threatening a “volcanic moment”.

Please consider Obama Aligns With Boehner in Seeking U.S. Debt Pact Amid Internal Strife

President Barack Obama and House Speaker John Boehner, each facing strife within his own ranks and dwindling time to avert a U.S. default, pressed for a broad agreement to boost the debt limit while cutting spending by trillions of dollars and overhauling the tax code.

Obama summoned top Democrats to the White House last night after Democrats balked at word of a potential deal between the president and Boehner that would reduce the long-term deficit by about $3 trillion over 10 years through deep spending cuts without an immediate increase in taxes. Democratic lawmakers said they feared the president was moving toward an agreement that undermined their party’s priorities.

“We are very volcanic at this moment,” Senator Barbara Mikulski, a Maryland Democrat, said as she left a session at the Capitol with White House budget director Jack Lew. “The clock is running, the Republicans are running from a real solution. I don’t want the president to be an enabler of that.”

Boehner met today with rank-and-file House Republicans to brief them on the talks. Representative Steve LaTourette, an Ohio Republican, said Boehner was “the most sort of melancholy I’ve seen him.” The speaker said yesterday he had prepared his members for a possible compromise with Democrats to raise the debt limit, and that he believed most of the 240 Republicans are prepared accept it.

Two congressional officials said the White House told party leaders it was pursuing a deal to cut spending, including on Social Security and Medicare, and a tax overhaul that could raise $1 trillion. That provoked an angry reaction yesterday from Senate Democrats, who said they feared they might be asked to swallow steep reductions in programs and trims to entitlement benefits with no assurance of higher tax revenue.

Obama wants those to include a tax increase on higher- income earners in 2013, while Republicans want to roll back portions of the health-care law Obama pushed through over their opposition in 2010, such as scrapping the mandate that every person have insurance or pay a penalty, according to a congressional official familiar with the talks.

Obama wants spending cuts to be gradual, with the fullest effects not felt until 2014 and beyond, to avoid shaking the economic recovery, the officials said, briefing reporters on condition of anonymity to discuss the closed-door talks.

Hopes were fading that a plan to shave $3.7 trillion off the deficit over a decade, presented earlier in the week by a bipartisan group of six senators and embraced by Obama, could hitch a ride on a debt-ceiling increase. The group hasn’t produced details sought by leaders, said two Democratic aides familiar with the deliberations.

Senator Tom Coburn of Oklahoma, a Republican member of the group, said there is “no way” it could be acted on before Aug. 2.

Senate leaders have also discussed a fallback plan by Reid and Republican leader Mitch McConnell of Kentucky to give Obama $2.4 trillion in borrowing authority. It could be combined with spending cuts and a committee charged with pushing through longer-term deficit reduction in the coming months. That, too, faced mounting obstacles, with 86 House Republicans signing a letter dubbing the measure the “cut, run and hide” plan and vowing to block it.

Standard & Poor’s warned there is a 50 percent chance it will lower the U.S. government’s AAA credit rating by one or more levels within three months. S&P; said yesterday that even if Congress raises the debt limit in time to avert a default it might lower the U.S. sovereign rating to AA+ with a negative outlook if it isn’t accompanied by a “credible solution” on the debt level.

The higher the cuts and the more front-loaded they are the better the deal, even if it includes some modest tax hikes. Clearly Obama wants all the cuts back loaded, after the election when the next Congress might even undo it.

Nonetheless, there appears to be a small window of opportunity to do something sensible but demagogues from both parties threaten that chance.

Mike “Mish” Shedlock
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