Debt deal now up to the leaders

President Obama will now take a leading role in negotiations to raise
the debt limit, a test of his leadership that will have profound
economic effects.

It appears negotiators will miss the July 1 deadline they set for themselves to reach an agreement after House Majority Leader Eric Cantor (R-Va.) abruptly withdrew from the talks last Thursday.

And there’s no clear path forward as the rhetorical positions of congressional Democrats and Republicans outside the talks have only hardened in recent days.

{mosads}Obama will meet this morning with Senate Majority Leader Harry Reid (D-Nev.) and this afternoon with Minority Leader Mitch McConnell (R-Ky.). Democratic aides characterized these meetings as an appeal to the “cooler heads” in the Senate.

Cantor’s sudden move was initially seen as a blow that threatened to collapse the talks. But Republican aides said Friday it was part of an expected and natural transition to the final phase, which they said would have to take place between the president and Congress’s highest-ranking leaders.

Cantor signaled as much on Tuesday when he told reporters that Obama would have to “seal the deal with the Speaker” and GOP sources said his decision to exit the talks with Biden was long planned.

This final phase won’t be made any easier by the presence of House Minority Leader Nancy Pelosi (D-Calif.).

Obama and GOP leaders cut Pelosi out of talks to extend the Bush tax cuts at the end of last year and to pass a stop-gap spending measure with $38.5 billion in cuts in April.

She will demand a seat at the table because Speaker John Boehner (R-Ohio) will need Democratic votes to pass a compromise. Pelosi kept her leadership position after the 2010 election, a debacle for House Democrats, by appealing to liberals within her caucus and this is her chance to justify their faith by driving a hard bargain. She will insist that raising revenues by closing special tax breaks be part of the deal.

“You cannot achieve what you set out to do if you say it’s just about cutting. It has to be about increasing the revenue stream as well,” Pelosi said Sunday on CNN’s  “State of the Union.”

Until now, the debt-ceiling talks have been a summit of seconds-in-command — Vice President Joe Biden, Cantor and Senate Minority Whip Jon Kyl (R-Ariz.) — with principals Obama, Reid and Boehner monitoring the talks from a distance.

The unresolved issues are what Biden has called “philosophically big-ticket items” such as tax increases and cuts to Medicare and defense spending.

It’s a tough test for Obama, whose handling of the economy has been the subject of mounting public disapproval. Gallup polling showed last week that the president’s approval rating had dropped to 45 percent while disapproval climbed to 48 percent. The Hill poll taken in early June showed 48 percent of likely voters said Obama had hurt the economy, while just 41 percent said he had helped it.

{mosads}Democratic lawmakers have privately and publicly criticized the president for not taking control of the deficit reduction debate.

The stakes couldn’t be much higher. If Congress fails to raise the debt ceiling by Aug. 2, the economic consequences would be enormous. Federal Reserve Chairman Ben Bernanke warned it would send the value of the dollar plunging and erode the nation’s credit rating, causing the cost of borrowing to soar.

Despite reports of progress from Biden’s group, congressional leaders remain far apart in their demands.

Senate Democratic leaders last week called for the debt-limit deal to include new spending on infrastructure and green energy technology.

McConnell summarily dismissed the Democratic proposal as “not serious” and reiterated his firm position that tax increases should be off limits.

But Obama appeared to endorse the Senate Democratic proposal in his weekly address Saturday.

 “We can’t simply cut our way to prosperity,” Obama said. “We need to do what’s necessary to grow our economy; create good, middle-class jobs; and make it possible for all Americans to pursue their dreams.”

Obama’s entry into the negotiations will address growing Republican criticism that he has been missing from the nation’s biggest policy debate.

“It is my hope that the President requested this meeting in order to finally explain what it is that he’s prepared to do to solve our nation’s fiscal crisis,” McConnell said Friday.

House Majority Whip Kevin McCarthy (R-Calif.) put it more succinctly: “He’s got to get off the golf course and he’s got to get engaged.”

Compromises on the big-ticket items will spark a backlash from the Democratic and Republican bases and will have to come from the very top.

Liberals such as Sens. Jay Rockefeller (D-W.Va.), Barbara Mikulski (D-Md.) and Sheldon Whitehouse (D-R.I.) have warned against cuts to Medicare and Medicaid.

Sen. Jim DeMint (R-S.C.), a leader of Tea Party conservatives, warned fellow Republicans Friday they would lose reelection if they increased the debt limit without making massive spending cuts. He and other conservatives have pledged to oppose a debt increase unless accompanied by a balanced budget agreement with strict restrictions against tax increases.

Cantor said Thursday the Biden talks had stalled over an impasse on tax increases.

{mosads}The group had agreed in principle to more than $1 trillion in spending cuts but hit a brick wall after Democrats demanded up to $400 billion in higher taxes. Democrats asked to cap tax deductions claimed by households earning more than $500,000 a year at 10 percent of adjusted gross income.

Democrats painted Cantor’s pullout as a reckless temper tantrum, given the progress of the meetings and the Aug. 2 deadline.

Democratic aides claimed Cantor’s walkout was designed to distance himself from a deal many Tea Party conservatives in the House are expected to oppose. Some compared it to former Rep. Newt Gingrich’s (R-Ga.) opposition to the tax-raising budget deal former President George H.W. Bush negotiated with Democrats in 1990.

The deal weakened then-Republican Leader Bob Michel’s support among conservatives and set Gingrich up to become Speaker.

Jim Kessler, senior vice president for policy at Third Way, a centrist Democratic think tank,  said Cantor was setting up a challenge to Boehner.

Kessler said it did not represent a collapse in the talks or significantly imperil the chances of reaching a deal, noting that a growing number of Senate Republicans have said they could support ending niche tax breaks as part of deficit-reduction legislation.  

A GOP leadership source dismissed this speculation as the product of “bored Democratic staffers who are looking for conspiracies that don’t exist.”

The source said Cantor had discussed a possible withdrawal with colleagues the night before but didn’t make a final decision until he woke up Thursday morning. Boehner and GOP staff were notified shortly before Cantor announced his decision in an interview with the Wall Street Journal.