Well, that was unexpected. After months of negotiations, after the White House offered Republicans a deal that would raise the Medicare eligibility age and cut Social Security by hundreds of billions of dollars and forswear any future leverage on the tax issue, McConnell countered with a deal in which the two sides wouldn't so much reach an agreement as they would agree that if they don't reach an agreement, Republicans will let Obama raise the debt ceiling and Obama will let Republicans criticize him for it. You've heard of snatching defeat from the jaws of victory? This is snatching press releases from the jaws of concessions.

Perhaps Republican leaders see this as their only way forward. One possibility is that they've come to realize that a deal is impossible, and as such, they need a face-saving way to raise the debt ceiling. Another is that they're worried that a deal is possible, but the White House will gain so much political benefit from it that Obama will become a lock for reelection, and thus long-term Republican goals are better served by forgoing a deal now but making it more likely they beat Obama in November.

Either way, the idea has received a mixed reaction. The Wall Street Journal editorial board has come out in support of it. Grover Norquist favors it. Speaker John Boehner said "I think Mitch has done good work." But Erick Erickson, at Red State, calls it "The Pontius Pilate Pass the Buck Act of 2011" and invited readers to "consider sending McConnell a weasel as testament to his treachery." Sen. Jim DeMint has said he won't support it. Rep. Jim Jordan, chair of the conservative Republican Study Committee, said, "I don't think it's going to fly with conservatives over here."

The split, in other words, pits the Republican establishment against the conservative base, and the establishment's record in such match-ups hasn't been so good over the last two years. My guess, meanwhile, is the White House will line up with the conservatives on this one, because for both substantive and political reasons, they really want a deficit deal, and see this as more evidence that this debate is going well for them and poorly for the Republicans.

So I wouldn't give the McConnell plan great odds. Which is sort of a shame. Because if the McConnell plan passed, you could see it becoming something of the norm. And if that happened, that would be the end of the danger the debt ceiling poses to the economy, the end of the worry that some combination of congress and president would fail to come to agreement in time and avert the catastrophic consequences of a cave-in. It would, in effect, be the end of the debt ceiling.

That's a big step in the wrong direction if you think we should give congressional minorities a semi-regular opportunity to hold the economy hostage in return for major policy concessions. But it's a step in the right direction if you believe that such high-stakes hostage opportunities are an insane and dangerous way for our political system to operate and that, in the long run, the country would be better off minimizing the harm that partisanship and gridlock could do to our economy rather than maximizing it. I'm mostly in that latter camp, but if the rest of the political system was there with me, we wouldn't be embroiled in this debt-ceiling debate at all.

Five in the morning

1) Mitch McConnell wants to let Obama raise the debt ceiling unilaterally, report Lori Montgomery and Paul Kane: "Senate Minority Leader Mitch McConnell moved Tuesday to head off a potentially disastrous U.S. default by offering President Obama new authority to raise the federal debt limit without cutting government spending...The proposal would transform the political dynamics of the debate, placing the entire burden for raising the $14.3 trillion debt limit on Obama. Republican lawmakers would be spared from voting to raise the limit and could shift their campaign for unprecedented spending cuts to the congressional appropriations process, where the risk of stalemate is shutting down the government instead of capsizing the U.S. economy. However, they would lose the approaching deadline as leverage to pursue their cost-cutting agenda."

2) My take: The case for McConnell's plan: "McConnell is proposing to permanently disarm the bomb that is the debt ceiling. He’d formalize the informal arrangement the parties have had in recent years, which is that the debt ceiling is used to embarrass the party in power, but it’s not allowed to threaten the American economy. If his plan passed, it’d become easier for the minority party to embarrass the majority party, but harder for them to threaten the economy...McConnell is giving us a way out of the hole we’ve dug for ourselves, and if the day ever comes that the two parties fail to raise the debt ceiling and the markets turn on us — something that may not be likely this year, but could well happen in time -- we’re going to wish we’d taken it."

3) Obama is warning that Social Security checks may not go out absent a debt limit hike, reports Russell Berman: "The prospects for a deal to raise the $14.3 trillion debt limit took a sharp negative turn Tuesday as President Obama warned that Social Security checks might not be sent after Aug. 2 without congressional action. 'I cannot guarantee that those checks go out on Aug. 3 if we haven’t resolved this issue. Because there may simply not be the money in the coffers to do it,' Obama said in an interview broadcast Tuesday by CBS News, in one of his starkest warnings about the consequences of a default by the U.S. government. Obama appeared to be taking a page from the Clinton administration playbook. In 1996, Treasury Secretary Robert Rubin warned Congress he would not be able to send out Social Security checks the next month, and the House soon after voted to allow the government to issue more debt."

4) The business lobby is pushing hard for a debt limit increase, report Jia Lynn Yang and Dan Eggen: "A sprawling coalition of Wall Street and Main Street business leaders sent an unmistakable message to lawmakers Tuesday: Enough squabbling. Get the debt ceiling raised. The message, sent in a letter to President Obama and every member of Congress, puts pressure on GOP lawmakers, who have staked out an uncompromising stance against raising taxes in the partisan wrangling over the country’s borrowing limit. Republicans rely heavily on corporations for political support and have regularly cited the opinions of these 'job creators' in their opposition to new tax revenue. Many of the House GOP freshmen most opposed to a compromise were swept into office with the help of financial support from groups behind the letter."

5) The Fed is split on pursuing more monetary stimulus, reports Neil Irwin: "Federal Reserve officials lack a strong consensus over what they should do next in setting the nation’s monetary policy, according to minutes of their last policy meeting, showing a mix of views as to why the U.S. economy remains weak and what, if anything, they should do about it. At a June 21-22 meeting, some leaders of the central bank argued that if there were no progress reducing unemployment, the Fed should consider further expanding the money supply -- which in practice would mean a third round of 'quantitative easing,' or buying hundreds of billions of dollars in Treasury bonds...If anything, the latest economic data -- particularly a very weak report on job creation in June that came out last Friday -- would tend to make the Fed more open-minded about new steps to bolster growth."

Rooftop cover interlude: Dale Earnhardt Jr. Jr. plays "Summer Babe" by Pavement.

Got tips, additions, or comments? E-mail me.

Still to come: The Fed is split on more monetary stimulus; big companies want exemptions from the employer health care mandate; entitlement cuts could take a number of likely forms; Obama's Commerce nominee is being blocked for his environmental views; and a dog eats an orange adorably.

Economy

Grover Norquist is deeply involved in the debt negotiations, reports Jason Horowitz: "The sacred texts from which Grover Norquist draws his political power are hidden in a secret fireproof safe. 'I keep the originals in a vault, in case D.C. burns down,' said Norquist, referring to the pledge that his organization asks politicians to sign, vowing to 'oppose any and all efforts' to raise taxes...He has, he said, been in e-mail contact 'on a regular basis' with 'leadership and leadership staff' during the debt talks, 'just to check in to see if there was anything they needed from me.' When he read in the news that House Speaker John A. Boehner (R-Ohio), a pledge-taker, was apparently considering a compromise, he simply dropped him a note asking, 'What did you say?'"

An unemployment benefits extension could be a part of a grand bargain on the debt, reports Arthur Delaney: "A deal to raise the statutory U.S. borrowing limit and cut the federal budget may preserve federal unemployment benefits set to expire at the beginning of next year, lawmakers said Tuesday...HuffPost asked Senate Majority Leader Harry Reid (D-Nev.) if congressional negotiators and the White House were considering reauthorizing the extended benefits as part of the deal. 'On the grand bargain, of course,' Reid said. Under current law, as of July, workers laid off through no fault of their own are ineligible for the extra weeks of federal jobless benefits that since 2008 have kicked in for those who exhaust 26 weeks of state-funded benefits. Congress has provided extra weeks of aid during every recession since the 1950s and has never let them expire with unemployment above 7.2 percent."

The European debt crisis has now reached Italy, report Anthony Faiola and Howard Schneider: "Europe’s escalating debt crisis is on the verge of engulfing by far its biggest victim: Italy, the world’s seventh-largest economy, whose sheer size could thwart any international attempt to bail it out. Italy has been deeply indebted for years, and its woes have generated a burst of investor panic in recent days amid concerns of political infighting in Rome over budget cuts. Italian bank shares have been battered, and the nation’s borrowing costs have skyrocketed to dangerous levels. More than anything else, investors appear to be losing confidence in the ability of bickering European leaders to come up with a lasting solution to the 20-month-long debt crisis, triggering a perilous spread of the region’s financial woes from small nations such as Greece to the far larger economies of Spain and now Italy."

Lobbyists are swarming to defend an obscure tax break, reports Robert Pear: "One of the biggest revenue-raisers proposed by President Obama in negotiations with Congress is what he describes as an arcane change in the tax treatment of business inventories -- things like steel, groceries and oil. But however complex the details, the effect of the change would be substantial, and in pushing for it Mr. Obama has kicked a hornet’s nest. Lobbyists from companies of all sizes are swarming around Congress to kill the proposal, which would prohibit the use of an accounting technique known as last in, first out, or LIFO. The technique is used to determine the cost of goods sold, and therefore the income earned, by a company. Mr. Obama’s proposal, projected to raise $65 billion to $95 billion over 10 years, would increase the taxable income and tax liability of companies that have been using this method of accounting for decades."

A White House advisor is becoming the IMF's second in command, reports Howard Schneider: "International Monetary Fund managing director Christine Lagarde named White House international economics adviser David Lipton as her second in command on Tuesday, and elevated former People’s Bank of China deputy governor Min Zhu to a newly created top job at the agency. Both appointments were expected. They reflect what many analysts consider commitments Lagarde made during her campaign for the IMF job to continue the longstanding tradition of naming an American as the agency’s number two, while also boosting the influence of major emerging markets such as China. Lipton is a veteran of international economic crisis negotiations and former adviser to the governments of Poland and Russia."

No matter what, taxes are going to have to rise, writes David Leonhardt: "A refusal to raise taxes, no matter how principled, cannot take us back to the good old days. It would instead lead to a very different American society. For taxes to remain where they are, Washington would need to end Medicare as we know it, end Social Security as we know it, severely shrink the military -- or do some combination of the above...Drawing up a credible deficit plan with neither Ryan-like cuts nor higher taxes will be impossible. And you can already see the start of a potential Republican compromise. It revolves around raising taxes, on net, by shrinking corporate or individual loopholes...In the end, the most likely tax increase may be the one that’s already on the books. On Jan. 1, 2013, all the Bush tax cuts -- on the affluent and nonaffluent alike -- are set to expire."

A debt deal needs to include more stimulus, writes Larry Summers: "The truth is that the expected impact of the deal over a 10-year period will not be its most important aspect except in the context of the current media cycle...Agreements reached now are subject to revision, potentially radical revision following next year’s election...Here is what is not getting its due attention. Decisions about spending and taxing over the next year or two will have a significant impact on job creation over the next year, the economy over the next decade and on the path of US national debt over an even longer horizon. Suppose any proposed deal could be adjusted, thereby adding an extra 1 per cent to gross domestic product growth over the next year...It would reduce deficits by about $400bn."

The time has come for an infrastructure bank, writes Michael Likosky: "A bipartisan bill introduced by senators including John Kerry, Democrat of Massachusetts, and Kay Bailey Hutchison, Republican of Texas, seeks a...modernized solution: it would create an American Infrastructure Financing Authority to move private capital, now sitting on the sidelines in pension, private equity, sovereign and other funds, into much-needed projects. Rather than sell debt to investors and then allocate funds through grants, formulas and earmarks, the authority would get a one-time infusion of federal money ($10 billion in the Senate bill) and then extend targeted loans and limited loan guarantees to projects that need a push to get going but can pay for themselves over time...The idea of such a bank dates to the mid-1990s...Today we find ourselves trapped in a vicious cycle that makes this proposal more urgent than ever."

Adorable animals overcoming their limitations interlude: A dog tries to eat an orange without peeling it.

Health Care

Big companies are lobbying for exemptions from the employer mandate, reports Janet Adamy: "It is three years before most of the new health-care law kicks in, but already some of America's largest employers are peppering the Internal Revenue Service with concerns that making the changes will be far more complex than they anticipated. At issue is one of the law's central requirements: employers with 50 or more full-time workers must offer affordable insurance or pay a penalty. It sounds simple enough. But in crafting the rules, the IRS and two other federal agencies are now tackling basic yet messy questions, such as who counts as a full-time worker and how do companies measure whether insurance is 'affordable.'...Wal-Mart Stores Inc., Gap Inc., United Parcel Service Inc., Hilton Worldwide Inc. and others have pushed for a lengthy grace period."

All kinds of health care lobbyists are pushing back against proposed Medicare/Medicaid cuts, reports Robert Pear: "Budget negotiators have not found a way to avert a government default on federal debt obligations, but with their ideas to cut Medicare and Medicaid they have managed to provoke opposition from almost every major group that represents beneficiaries and health care providers. The latest provocation was a list of proposed savings presented at the White House this week by the House majority leader, Representative Eric Cantor, Republican of Virginia...Mr. Cantor’s list included 27 proposals that he said would save up to $353 billion over 10 years, in the context of a budget deal that could save anywhere from $2 trillion to $4 trillion over the same period. Items on the list touched off howls of protest from lobbyists and Democratic lawmakers who saw details for the first time on Tuesday."

Republicans should repeal the Independent Payment Review Board, but also replace it, write Paul Howard and Douglas Holtz-Eakin: "IPAB is fatally flawed, structured to punish innovative health care providers and threaten seniors’ access to care...But the impulse behind this action -- injecting some rationality into how Medicare pays for care for seniors and protecting the program from congressional meddling -- makes sense. So instead of just repealing IPAB, Congress should replace it with a bipartisan mechanism for promoting cost control, improving quality and injecting competition into the health care system...Congress should commit to a hard cap for Medicare spending, in tandem with the creation of a true Medicare premium-support program."

Domestic Policy

Entitlement cuts could take a number of different forms, reports Alec MacGillis: "Some outside budget analysts say that even a smaller deal, in the $2 trillion range, would be difficult to make without resorting to savings from Social Security. The most likely form this would take is a technical adjustment to the formula used to calculate cost-of-living increases in benefits. Experts have long argued that the formula overstates inflation because it does not take into account changes in consumer behavior in response to rising prices...A debt deal will involve more Medicare reductions. The House GOP proposal would cut $250 billion from the program by, among other things, raising premiums for wealthier retirees, reducing payments for home health aides and raising co-payments for lab services. A major likely savings is restricting the Medigap policies seniors buy to supplement their regular Medicare."

Long form interlude: An oral history of the Stanford Prison Experiment.

Energy

Obama's Commerce Secretary nominee is being blocked because of his environmental views, reports Felicia Sonmez: "A Republican senator on Tuesday announced he was placing a hold on President Obama’s candidate to succeed Gary Locke as commerce secretary over concerns about the nominee’s record on environmental issues. Sen. James Inhofe (R-Okla.) announced at a news conference with the American Conservative Union and Freedom Action that he is blocking John Bryson’s nomination because 'economic growth in Oklahoma and across the nation could be in jeopardy.'...Bryson has received the support of organizations including the U.S. Chamber of Commerce, which praised him as “a strong voice for American businesses.” The former Edison International CEO founded the National Resources Defense Council in 1970 and left the organization in 1974"

A House vote to repeal a light bulb efficiency rule failed, reports Darren Goode: "House lawmakers Tuesday stymied an initial effort by Republicans to put an end to infamous light bulb efficiency standards. The bill from Rep. Joe Barton (R-Texas) to repeal part of a 2007 energy law requiring traditional incandescent light bulbs to be 30 percent more energy efficient beginning in 2012 failed to get the necessary two-thirds support needed for approval under expedited rules. A majority of members -- 233 -- supported the repeal, including five Democrats. Ten Republicans joined 183 Democrats opposing the measure. House Minority Leader Nancy Pelosi personally whipped Democratic Caucus members to vote against the bill, a Democratic aide told POLITICO."

Jeff Bingaman will still likely introduce a clean energy standard bill, reports Ben Geman: "Senate Energy and Natural Resources Committee Chairman Jeff Bingaman (D-N.M.) will likely release a proposal for a clean energy standard (CES) to boost low-carbon electricity despite an impasse with the panel’s senior Republican, a top Bingaman aide said. Bingaman and committee ranking member Lisa Murkowski (R-Alaska) are at odds over Murkowski’s insistence that a CES must replace federal greenhouse gas regulations. Bob Simon, Bingaman’s committee staff director, said Tuesday that Bingaman will likely release a proposal, but acknowledged the huge political hurdles to bipartisan agreement."

Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams.

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July 13, 2011