Credit Threats and Debt Ceiling Deadline Loom

The Democrats play hardball -- and it may be paying off.

As the debt crisis in the European Union vis-a-vis Greece plays itself out, global credit rating agency Fitch Ratings reminded the world that America has a crisis of its own. On Tuesday, Fitch noted that our country's sovereign rating would be placed on "watch negative" if Congress fails to raise the debt ceiling by August 2nd. Furthermore, if the U.S. misses its coupon payment on August 15th, the agency would characterize that failure as a restricted default. Other credit rating agencies, such as Moody's, along with Standard & Poor's, have issued similar warnings regarding U.S. Treasury securities. But this was the first time a major credit agency has threatened to officially downgrade them, even if that downgrade is temporary. The conventional wisdom is that the $14.3 trillion debt ceiling will very likely be raised. In a sharply divided Congress, what it takes to reach such an agreement -- in an election year, no less -- remains to be seen.

Vice President Joe Biden and administration officials have been involved in negotiations with House Majority Leader Eric Cantor and other Republicans since May 5th, with Joe Biden reporting that, as of last Thursday, they're getting down to the "real hard stuff," referring to the philosophical divide between the parties. He remains optimistic that a deal can be reached before Congress goes on hiatus beginning in early July. “Everyone wants an agreement,” the vice president said. “There’s no principal in that room that doesn’t want to get an agreement that bends the curve on the long-term debt, and that is sufficiently realistic to get us to $4 trillion over a decade or so in terms of reduction.”

What is the philosophical divide? Reduced to the basic fundamentals, it comes down to a Republican Party which wants spending cuts equal to the amount the debt ceiling would be raised ($2 trillion), with an eye on reforming the massive entitlement programs in the process. The Democratic Party is also willing to reduce spending, but wants to raise taxes as part of the equation. Reportedly the group has reached an agreement on $1 trillion of cuts, yet the central issues of taxes and spending caps remain unresolved.

As for their own plan to address entitlements, Democrats have remained vague by design. This is a reality reflected most recently during the replacement election in New York's 26th Congressional district in May, where Democrats won a seat in a Republican stronghold partly by demagoguing Wisconsin Rep. Paul Ryan's Medicare reform plan without offering any alternative of their own. Biden reiterated that approach, noting that while Democrats will address Medicare, “I don’t mean major Medicare reform, but just changes in health policy,” he said.

Calculated vagueness may also explain why Joe Biden, and not president Obama, is involved in the budget talks, something which apparently irritated Sen. Orrin Hatch (R-UT). “The president has said he’s not going to get involved,” Hatch revealed during a June 8th GOP press conference on the economy. “He’s our leader. He should get involved and not shovel it off to someone else.” Sen. Ron Johnson (R-WI) concurred. “This is important,” he echoed. “This requires his full attention, 24 hours a day. My problem is that I haven’t seen this president engaged.”

Yet both the president's and the Democrats' strategy may be paying off. A poll conducted by the Pew Research Center for the People & the Press and The Washington Post from June 16-19 of 1,003 adults, shows that more Americans would blame Republicans than Democrats if a deal on raising the debt limit cannot be achieved. The margin is 42 to 33 percent. This margin reflects the partisan divide, with 58 percent of Republicans blaming the Obama administration, and 72 percent of Democrats blaming Republicans. Independent voters are in a virtual tie with 36 percent holding Republicans accountable, and 34 percent blaming Democrats. Another 17 percent would blame both sides equally.

Yet the that poll is hard to square with one taken by CBS from April 15-20. In their sampling of 1,224 adults, 63 percent of Americans opposed raising the debt ceiling, while only 27 percent were in favor, and 10 percent didn't know. Since Democrats have been the party which wanted a "clean" bill, raising the ceiling with no pre-conditions, even as Republicans have refused to consider doing so without substantial trade-offs, only two reasonable conclusions are possible: one or both polls are highly inaccurate, or the American public is largely confused about the intricacies of the economics surrounding debt ceilings, deficits and budget negotiations.

Perhaps complicating matters for Republicans even further is an initiative being pushed by the conservative wing of the party. The "Cut, Cap, Balance Pledge” seeks a threefold promise from Republican lawmakers: cuts in spending to reduce the deficit this year and thereafter, enforceable spending caps putting federal spending on a path to a balanced budget, and a Balanced Budget Amendment to the U.S. Constitution -- but only one that includes both a spending limitation and a super-majority for raising taxes, in addition to balancing revenues and expenses.

As of Tuesday, some Republicans had signed the pledge. They include Sens. Mike Lee (R-UT) , Jim DeMint (R-SC), Jerry Moran (R-KS)  Marco Rubio (R-FL) and Rand Paul (R-KY), as well as Reps. Jason Chaffetz (R-UT) Jim Jordan (R-OH) and Joe Walsh (R-IL). Senator DeMint went one step further last weekend, telling the Republican Leadership Conference that he wouldn't support any party candidate for election who didn't sign it.

Yet Republican leadership in the Senate has yet to embrace the plan, more than likely seeing it as a hard-line, take-no-prisoners agenda which would undermine the compromises necessary to reach a budget agreement with Democrats. But Colin Hanna of LetFreedomRing, one of the groups supporting the agenda, says he plans to release a poll at next Wednesday's official launch of the initiative which shows that the American people support this kind of approach to the budget. “If the people are behind it, their leaders had better (sic),” Hanna told the Daily Caller. “The public is fed up with the standard Washington deal-making process where every deal turns out to be less that it appears at first glance.”

Maybe so, but economic realities are still constrained by politics, cynically reflected by two realities. First is the fact that the Democratically-controlled Senate has considered -- and rejected -- four different budget proposals this year, leaving the country without a budget for FY2012. The most emphatic rejection was the 97-0 defeat of the budget submitted by president Obama, underscoring his determination to stay out of the process during an election year.

Second, despite denials by both Republican Leader Eric Cantor, who told reporters, "I don't see how multiple votes on a debt ceiling increase can help get us to where we want to go," and Democrat Rep. Steny Hoyer, who said, "Temporary is better than none, but temporary continues to roil the market," it is possible raising the debt ceiling will be done by enacting a modest -- and short-term -- debt reduction bill, as Senate Minority Leader Mitch McConnell told "Face the Nation" last Sunday. In other words, kick most of the debt ceiling can down the road until after the 2012 election. On June 14th, Ben Bernanke warned Congress about the consequences of such political gamesmanship. "I fully understand the desire to use the debt limit deadline to force some necessary and difficult fiscal policy adjustments, but the debt ceiling is the wrong tool for that important job," he said.

The lone remaining member of the president's original economic team, Treasury Secretary Tim Geithner, insists a deal will be made. "We're going to avoid a default crisis, no doubt about that," Geithner told business executives yesterday. Yet he also had this to say, according to a report by CNS News. “We don’t see a realistic path to solving all of this at once in the next few weeks. It’s just not possible.”

What is possible? Senate GOP Leader Mitch McConnell thinks its time to rise above politics. "We can do something important for the country together, and this is the opportunity," he offered. "That is the importance of this debt ceiling moment."

An admirable thought to be sure. But perhaps Rep. Ron Paul (R-TX),  the only Republican presidential candidate to sign the Cut, Cap and Balance Pledge, put it more realistically. “When our creditors finally wise up and cut us off, we will be forced to face economic realities whether we want to or not," he wrote. "[L]eaders in Washington have no political will to admit that we cannot afford to continue spending without any meaningful limit. They prefer maintaining the illusion and putting off reality for another day."

As of now, that day is August 2nd.

Arnold Ahlert is a contributing columnist to the conservative website