George Zornick | The Nation

George Zornick

George Zornick

Action and dysfunction in the Beltway swamp. E-mail tips to george@thenation.com

Democrats Capitulate on Revenue—or Do They?

The proposals and counter-proposals and counter-counter-proposals on how to pass a debt ceiling hike have been flying at a furious pace in Washington. Most people left their offices in the capital on Friday contemplating a “grand bargain” between President Obama and House Speaker John Boehner, in which there would be about $3 trillion in cuts, serious reductions in Social Security, Medicare and Medicaid benefits, and $800 billion in new revenues—generated by a tax code overhaul that would have lowered overall rates but closed a wide variety of personal and corporate loopholes and exemptions.

But before Friday’s happy hours were even over, the deal was dead. An angry President Obama appeared from the White House podium just after 6 pm, blasting Boehner for pulling out of the deal that Obama described as “unbalanced in the direction of not enough revenue.” Boehner appeared at a Hill press conference not long after, blaming Obama for insisting on an additional $400 billion in revenue.

Negotiations are now being conducted between Congressional leaders. Republicans are crafting plans to enact a short-term debt ceiling hike, with commensurate cuts and no revenue, while the White House and Congressional Democrats insist any short-term hike is unacceptable and won’t pass the Senate nor be signed by the president. Instead, Senate Majority Leader Harry Reid is reportedly crafting a package that cuts $2.7 trillion in spending, with no revenue increases, and raises the debt ceiling until 2013.

Though it’s hard to rule out any possibilities as Boehner and Reid crank the debt ceiling Rubik’s cube, one thing seems clear: revenues are permanently off the table. Since Reid has released a revenue-less proposal with one week and a day until the country defaults, it’s hard to see how revenue is revived for any deal.

Removing revenue from the deal seems like (yet another) stunning capitulation by Democrats. For months, both the White House and Congressional Democrats have been insisting that new revenue must be part of any deal. As recently as Thursday, Reid himself said “there has to be some revenue in the cuts, my caucus agrees with that, and hope the president sticks with that.”

In this sense, the Republicans have won. Their original position all along was to cut spending without revenue increases, it now seems they will succeed in making Grover Norquist happy. And in a larger sense, forcing a Democratic president and a Democratic Senate to cut trillions of dollars in spending amidst a recession is a substantial political feat.

But there are some important ways in which the Republicans’ hard line on taxes may have been self-defeating in the long run, and why Reid’s new proposal isn’t so bad given the alternatives.

For one thing, entitlement cuts seem to also be off the table, and that would have been a disaster at both the political and policy levels. (Paul Krugman has a terrific evisceration of the proposed entitlement cuts today.)

More important to note is that the new revenue in the grand bargain would have essentially replaced an expiration of the Bush tax cuts. Under the grand bargain, a tax code overhaul—which, again, lowered rates while eliminating exemptions—would have done away with the old tax system and replaced it with a new one, and the Bush tax cuts become a non-issue.

The expiration of the Bush tax cuts would generate far more revenue for the government than the $800 billion in the original grand bargain—and would also raise rates on top earners instead of lowering them.

Obama already pledged a fight on letting the Bush tax cuts expire—he was actually slyly reneging on that pledge with the tax overhaul proposed in the grand bargain, but with its death comes an opportunity for Democrats to fight another day on a more fair tax system that generates more revenue.

It’s extremely unlikely that Boehner didn’t realize this. But reports suggest he just can’t get his hard-line members to agree on any revenue generation now. Too bad for them—and not so bad for Democrats. 

Gang of Pain: Who Suffers Under the Bipartisan Deficit Reduction Scheme

President Obama endorsed the Senate's Gang of Six deficit reduction plan Tuesday, saying that the proposal “is broadly consistent with the approach that I’ve urged” and “makes sure that nobody is disproportionately hurt from us making progress on the debt and deficits.”

However, an examination of the plan’s specifics reveals that corporations and wealthy Americans won’t feel much pain at all—in many cases, just the opposite. The plan slashes taxes and could bring the top personal income rate down as low as 23 percent—meaning CEOs like Jamie Dimon and Lloyd Blankfein could see their after-tax income increase by as much as $3 million, according to Dean Baker, co-director of the Center for Economic and Policy Research. The corporate tax rate would be reduced from 35 percent to between 23 and 29 percent under the proposal. (Supposedly enough loopholes would be closed to keep total revenue from corporate taxes the same. Even in that scenario, corporations won’t pay an extra penny). Military spending also remains virtually untouched.

Meanwhile, the harm done to seniors, students, working families and others under the Gang of Six plan is unmistakable. Social Security benefits would be reduced, and there are also cuts to Medicare and Medicaid. Students and the disabled would lose some federal government support. Here’s a quick look at who would be most harmed under the new most popular proposal in Washington.

Seniors: Americans over age 65 get hit from several directions under the Gang of Six proposal. First, the plan reduces Social Security benefits by 0.3 percentage points per year by tinkering with the formula that adjusts benefits based on inflation. This could lead to annual reductions of over $1,300 for some seniors. Social Security is solvent through 2037 and does not contribute to the deficit, so this change is particularly misguided.

Medicare also would also face serious reductions. The plan directs the Senate Finance Committee to reduce doctor payments by $300 billion and then cut another $200 billion from the program overall. To achieve that, anything from raising the eligibility age to increasing cost-sharing could be considered and would almost have to be in order to find savings of that magnitude.

The poor: Medicaid will no doubt suffer under the Gang of Six plan, though it’s not possible to put a dollar amount on the cuts yet. The proposal says that the government must “spend healthcare dollars more efficiently in order to strengthen Medicare and Medicaid.” That’s obviously code for spending fewer dollars, which means Medicaid recipients can expect to receive less.

The cuts would be negotiated by another bipartisan group of senators over the next six months, but the starting point for Republicans on Medicaid is downright draconian. In the budget passed by House Republicans earlier this year, supported by a vast majority of Republicans when it came up for a vote in the Senate, the program would be cut by a whopping 35 percent by 2021—even as medical costs skyrocket between now and then. It’s not likely the GOP would win that steep of a reduction, but even halfway to that point would be catastrophic for Medicaid recipients. As none other than Sen. Kent Conrad, a key figure in the Gang of Six, told the Huffington Post in June, Medicaid operates on such low overhead that a cut “goes right to medical services.”

The disabled: The Gang of Six plan completely eliminates a disability insurance program created under the 2009 healthcare reform bill. The Community Living Assistance Services and Supports Act, or CLASS Act, provides in-home care for anyone who becomes disabled, as an alternative to being placed in a nursing home. It provides up to $18,250 annually for these costs, with no lifetime cap. Premiums are $5 per month for students or people under the poverty line, and about $123 per month for everyone else, but it’s also voluntary—anybody can ask their employer to simply opt out.

The elimination of the CLASS Act is another example of sacrificing a valuable program that simply does not contribute to the deficit but rather conflicts with conservative ideology. The Congressional Budget Office estimates the program actually saves the government $70 billion through 2019, because people have to pay premiums for five years in order to qualify for benefits. It also keeps people out of nursing homes, which are a major driver of increasing medical costs.

Students: The Gang of Six blueprint directs the Senate Committee on Health, Education, Labor and Pensions, which oversees federal student loan programs, to come up with $70 billion in budgetary savings. Given the somewhat limited scope of what the Committee oversees, in terms of areas that actually create federal expenditures, it’s virtually impossible it could find savings of that scale without serious changes to federal student loans.

One idea popular with the Bowles-Simpson debt commission, and echoed recently by Representative Eric Cantor, would be to end the Stafford student loan program, which subsidizes the interest on loans while students are enrolled in college. An outright elimination of the program would save the government $40 billion over ten years, but would force students to pay interest on their college loans while still in school and likely not drawing much of an income, if any.

Pell Grants, which are federal scholarships for low-income students, are also likely to be on the chopping block. The program is already running an $11 billion deficit, and will no doubt be a juicy target for Senators looking to get $70 billion in cuts.

These are the areas currently identifiable based on the Gang of Six blueprint—but it calls for massive, yet-unspecified spending reductions, and possibly discretionary spending caps down the road. Given the current slant towards reductions for needy Americans in the blueprint, it’s hard to imagine future reductions will be any different. 

Who Is Richard Cordray?

When Representative Luis Gutiérrez, a liberal member of the House Financial Services Committee, heard over the weekend that President Obama had nominated Richard Cordray to head the Consumer Financial Protection Bureau, he wasn’t sure what to think. Not because he was unsure about Cordray’s record—Gutiérrez just didn’t know who he was.

“I am not familiar with Attorney General Richard Cordray, but a quick Google search was very reassuring,” Gutiérrez said in a statement Monday. “He is the type of strong, experienced leader we need to get the agency fully up and running.”

Cordray may have a very low national profile, but in Ohio—where he’s been active in Democratic politics since the early ’90s, and served as state attorney general for two years beginning in 2009—he’s much more of a known commodity.

Since the economic crisis in 2008, Ohio has been plagued with high foreclosure rates. One out of every 608 homes in the state is in foreclosure, and in the Cleveland area, foreclosures have tripled since 1998. The problem was exacerbated by mass “robo-signing” fraud by big banks in the aftermath of the collapse—banks were routinely foreclosing on homes without the proper paperwork or legal documentation.

Cordray quickly stepped in, and last fall was the first state attorney general to sue a mortgage lender over foreclosure fraud. He targeted GMAC Mortgage and Ally Financial, the parent company, and immediately demanded to meet with other top lenders in the state, including Bank of America, JPMorgan, Citibank and Wells Fargo.

The White House reaction to the emerging robo-signing scandal was rather cautious at the time. “We are looking at their process in order to determine their compliance with the law,” then–White House Press Secretary Robert Gibbs said. “Obviously, they have certain requirements under the law that have to be met, and if they're not meeting those requirements they certainly face fines from us and they can face legal actions from homeowners.”

Cordray opened a much more direct line of attack on the industry itself. “What we’re talking about here is not just sloppy paperwork,” he said. “We’re talking about fraud in a court of law. The [foreclosure document signers] were lying under oath, to a judge.” He later characterized the big banks’ foreclosure processes as “a business model built on fraud.”

Only weeks after filing the lawsuit, Cordray lost a statewide election for attorney general to former Senator Mike DeWine, and was quickly picked by Warren to head the CFPB’s enforcement bureau. But his aggressive work combating foreclosure fraud wasn’t the only time Cordray faced off against Wall Street during his short two years as attorney general.

In 2009, Cordray was the lead plantiff in a multibillion-dollar suit against Bank of America over its acquisition of Merrill Lynch during the frenzied economic collapse the previous fall. Cordray sued on behalf of Ohio’s largest public employee funds, claiming that Bank of America had misled them about the poor financial condition of Merrill Lynch prior to the acquisition.

Cordray also reached a settlement on behalf of Ohio schools and pension funds with insurance giant AIG over a “conspiracy” to provide fake commercial casualty insurance quotes. The schools and pension funds received $9 million from AIG in the settlement.

Ed Mierzwinski, the consumer program director for Ohio PIRG, worked frequently with Cordray’s staff during his tenure as attorney general and praised his tough stance against big banks, and added that he was “extremely well-qualified” to head the CFPB. “He recouped a lot of money from Wall Street banks that they looted from Ohio retirees, homeowners, pension funds and Ohio municipalities,” Mierzwinski said.

If confirmed as head of the CFPB—which will be no easy task, given Republican intransigence—Cordray will still be tackling some of the same issues he faced as attorney general, only on a much bigger stage. Foreclosure fraud will no doubt be high on the list, as it continues to plague several areas of the country. “Robo-signing is not even close to over," one Michigan county official told the AP this week. “It's still an epidemic.”

Naturally this has Wall Street a bit concerned over Cordray’s nomination. One attorney who represents the industry said that of all the officials at CFPB now, Cordray “frightens me the most.” Another bank lobbyist said Cordray has “all the hard edge and ambition of [Elizabeth] Warren without the charm.”

But bankers back home have a bit of a different view, indicating that perhaps there’s something to Obama’s claim in the Rose Garden on Monday that Cordray “successfully worked with people across the ideological spectrum, Democrats and Republicans, banks and consumer advocates.”

In an interview with The Nation, Jeffrey Quayle, a senior vice president and general counsel with the Ohio Bankers League, echoed typical industry concerns that the CFPB has “an unlimited budget [with] no checks and balances.” But Quayle said he supports Cordray for the job.

“We haven’t agreed on policy, but he has been available and accessible to debate issues with us,” Quayle said. “He’s proven to be a competent manager.”

Ohioans like Quayle have had a long time to get to know Cordray, who had a twenty-year career in state politics. He was elected to the state house in 1990, and when his seat was redistricted, Cordray ran for Congress in the 1992 elections. He lost a three-way race in a fairly conservative central Ohio district. He later served as the state’s first solicitor general and as the treasurer in Franklin County.

In 1998, during his first, unsuccessful attempt at being elected state attorney general, Cordray told the Columbus Dispatch that his parents inspired him to a life of public service. His father was born blind, and became a program director for a treatment center for the mentally disabled. His mother, who died while Cordray was in college, was a social worker who founded the first foster grandparent program in Ohio that matched elderly foster parents with mentally disabled youths.

Cordray said he spent a considerable amount of his childhood around these programs. “It gave me a leaning towards social services and the Democratic Party before I started to think these kind of things out for myself,” he told the paper. “My parents never ran for political office, but they set an example for public service.”

Running for Congress in a conservative district, Cordray certainly had to make attempts at bipartisanship. During that race he pledged to leave federal office in four years if the federal budget deficit wasn’t halved, and publicly challenged then–Vice President Dan Quayle to make the same pledge during one of Quayle’s campaign stops in Ohio.

While Cordray did embrace a seemingly hawkish stance on the deficit, he had a decidedly uncompromising prescription for addressing the problem. He told the Columbus Dispatch that “billions can be saved by canceling the B-2 bomber, charging market rates for leases of federal lands for timber and mineral production, scaling back the Strategic Defense Initiative and abolishing Radio Free Europe.”

Bernanke Not Ready to Address Unemployment... Yet

 Unemployment is stuck above 9 percent, and recent jobs reports have been increasingly ominous. With the legislative branch mired in what can charitably be called cataclysmic paralysis, the Federal Reserve stands as one of the few Washington institutions that can help goose the economy and stimulate employment.

In November, the Fed began a second round of quantitative easing, in which it bought up $600 billion worth of long-term US Treasury bonds in order to lower interest rates and stimulate growth. That program ended on June 30.

On Capitol Hill this week, Fed chairman Ben Bernanke faced an onslaught of questions in both the House and Senate about the possibility of a third round of quantitative easing given the still-dire employment situation. Republicans, who deeply oppose such a move, seemed nervous that Bernanke would undertake QE3. Democrats generally seemed nervous that he wouldn’t. Bernanke’s scattershot testimony managed to alternately satisfy and frustrate both sides—perhaps indicated that the Federal Reserve is as divided as the Congress.

On Wednesday, appearing before the House Financial Services Committee, Bernanke said “the possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might re-emerge, implying a need for additional policy support.” Media reports proclaimed the Fed was prepared to undertake QE3, and the stock market rallied.

The next day, appearing before the Senate Banking Committee, Bernanke dialed back those expectations.  “We’re not proposing anything today,” Bernanke said. “The main message I want to leave is that this is a serious situation. It involves a significant loss of human and economic potential.” Stocks fell on the news.

How should Bernanke’s comments be interpreted—will the Fed try to help the address the jobs crisis? It’s somewhat odd that he sent mixed signals, given that the Fed chairman’s words and actions are parsed so closely that investors can find themselves examining the size of his briefcase on a particular day.

One possibility is that Bernanke is walking a tightrope because the Fed itself is divided on QE3. “I think that he’s trying to manage dissent at the Fed,” said Dean Baker, co-director of the Center for Economic and Policy Research. “I don't have any inside knowledge, but it is pretty clear that many members of the [Federal Open Market Committee, a part of the Fed] wants him to be fighting inflation. I suspect the deal was a wait and see approach and he may have been worried that he looked like he was jumping the gun yesterday.”

Inflation is a byproduct of quantitative easing, and is often used as the counter-argument to taking action. But inflation is low, unemployment is high, and progressive economists advocate aggressive action. Baker echoed an argument from Paul Krugman, who noted that at Princeton, Bernanke advocated a Japanese response to their fiscal crisis that involved targeting a high inflation rate—around 3 to 4 percent. “That would lower real interest rates and reduce debt burdens,” said Baker. “That probably is not politically feasible, but it would be good policy.”

As for what is feasible, Baker suggested targeting a longer-term interest rate, perhaps a 1 percent target for the five-year rate through 2012.

Either way, it’s clear that Bernanke is not yet ready to take action. Perhaps there’s solace in the fact he even floated the idea—that passes for progress in Washington these days. 

Mitch McConnell Opens the Escape Hatch in Debt Limit Talks

Despite daily meetings at the White House and a flurry of press releases from negotiators, a deal to raise the debt ceiling effectively died over the past several days. On Saturday, House Speaker John Boehner pulled out of talks that might have produced a “grand bargain.” President Obama was reportedly willing to raise the Medicare eligibility age from 65 to 67, tinker with Social Security’s cost-of-living formula, lock in tax rates below a full repeal of the Bush-era cuts, and enact $4 trillion in spending cuts. The catch was that he also insisted on raising government revenue, which prompted Boehner’s walkout.

Revenue and recalcitrant Tea Party members stand as seemingly immovable obstacles to a deal. There are at least sixty or seventy Republicans in the House, mostly Tea Partiers, who will vote against any deal that comes before them—either on principle, because they simply don’t believe the debt ceiling should be raised at all (John Boehner admitted this on Fox News yesterday), or because they will only approve a deal that includes a balanced budget amendment, which is not making it into any package.

These holdouts mean that any deal will need significant Democratic votes to pass the House. But minority whip Steny Hoyer has vehemently insisted that a bill that doesn’t raise revenue won’t get a single Democratic vote, and he’s probably right. Meanwhile, majority leader Eric Cantor has said that any deal that does raise revenue won’t get Republican votes—also probably correct. This impasse isn’t likely to be resolved. The Rubik’s cube, as Boehner calls it, is basically unsolvable.

Faced with the very real possibility of a federal default, Senate minority leader Mitch McConnell opened the escape hatch yesterday. He floated a plan that would give Obama the authority to raise the debt limit all by himself. There’s a catch, of course—Obama has to request the increase three times before the end of next year, with the final request coming only months before the presidential election.

Under McConnell’s plan, when Obama requests a debt limit increase, $100 billion is given to him automatically. He must also outline spending cuts commensurate to the increase. Then Congress has to consider his request to raise the debt limit, and either chamber can pass a “resolution of disapproval” by a simple majority vote. That freezes the increase, but only temporarily—Obama can veto that resolution, meaning Congress would need to muster two-thirds of members to overturn that veto, which will not happen.

It’s a stunning de-leveraging of their position—after spending much of 2011 threatening to execute the economy unless they get their way, McConnell is now proposing to just release the hostage without one scrap of policy concessions from Democrats. Obama will propose spending cuts, but there’s nothing guaranteeing anything happens with that proposal.

One certainly wonders if McConnell was pressured to act by his Big Business backers once negotiations hit a wall. In his remarks yesterday, McConnell said that it was “extremely important that the country reassure the markets that default is not an option.” A large coalition of Wall Street and Main Street business leaders stepped up public pressure to find a deal this week, and there is increasing concern over market potential market reactions even before August 2.

For progressives concerned about contractionary spending cuts or damaging changes to social welfare programs, news of McConnell’s proposal was welcome. “I think it's great,” said Dean Baker, co-director of the Center for Economic and Policy Research. “It shows that Wall Street would never let the Republicans default on the debt, as I had been saying all along. Now they need cover to back down, and this plan is all about cover.”

Baker said he is not worried about the $2.5 trillion in cuts Obama must propose, since the president simply has to make them unpalatable to Congress, and then nothing will happen. “If Obama can't just blow off the cut proposals—suggest cutting all spending in Kentucky and Ohio—then he isn't competent to be running a corner grocery store, much less the country,” Baker said.

He remained equally unconcerned about the political ramifications. “People are going to vote based on jobs. No one cares about this idiocy other than the Washington press corps,” Baker said.

So there it is—the debt limit standoff has been defused without a single damaging policy outcome. But it is worth at least pausing to consider how the staggered increases Obama must request might influence the upcoming elections.

Imagine it’s July 2012, and the election is in full swing. Polls show an extremely tight race between Obama and Mitt Romney, and the two candidates jockey for slight advantages through a relentless grind of carefully calibrated stump speeches and attack ads. The media devotes days of coverage to minutae, like the tire-pressure gauges or “lipstick on a pig” incidents of summer 2008.

Then President Obama must leave the campaign trail, return to Washington and ask Congress to increase the nation’s debt limit so he can keep borrowing money—$900 billion, to be exact. After two days of fiery floor speeches from Republicans, the House of Representatives dramatically rejects his near-trillion-dollar borrowing request.

Attention turns to the Senate, where—much to the delight of political reporters everywhere—nobody knows how the vote will turn out. Democratic Senators in red states who are themselves up for re-election in the fall, like Sens. Claire McCaskill, Jon Tester, Ben Nelson and Joe Manchin announce they will vote against their president and their party. This puts centrists like Mark Warner and, alas, Joe Lieberman in the driver’s seat. Crossroads GPS blankets the airwaves in the state of any Democratic Senator up for re-election, pressuring them not to vote for deeper national debt.

Perhaps the Senate doesn’t end up passing a disapproval resolution, and the kabuki ends there. But if it does pass, it sets up yet another vote in the House and Senate. Republicans once again take their time on the floor, denouncing the president’s profligate ways and urging an overturn of the veto. There isn’t anything close to a 2/3rds majority needed to overturn it, but along the way a bunch of vulnerable Democrats are put in an incredibly difficult position.

Meanwhile, Romney gleefully crisscrosses Florida and Ohio, denouncing the borrow-and-spend president to every microphone put near his face.

If these events suck up media oxygen for even a couple weeks, it’s a nightmare scenario for the Obama campaign, not to mention the campaigns of vulnerable Democrats across the country. But is that a worthwhile tradeoff in order to avoid a debt deal that would almost certainly damage the already fragile economy?

That's the White House's choice now, but McConnell’s deal first has to pass. And so we return to the House of Representatives. Boehner said he supports McConnell’s plan, but he will have to convince his party to accept a concession-less deal. One GOP House aide told National Review Online yesterday that it's a non-starter there.

This is the true nightmare scenario. If McConnell and the GOP leadership can’t open the escape hatch, what then?

Will Eric Cantor's Financial Backers Allow Him to Kill a Debt Ceiling Increase?

House Democrats are circulating a resolution accusing majority leader Eric Cantor of a salacious conflict of interest: he owns shares in a fund that takes a short position on long-dated government bonds, which in layman’s terms means Cantor stands to profit if the government defaults on its debt, and so probably shouldn’t be such a prominent negotiator in the ongoing debt ceiling talks.

It’s a juicy bit of meat, but the attack is actually pretty silly. According the resolution, which was obtained by the Huffington Post, Cantor's shares in that fund total $3,300, and it’s quite a stretch to imagine that someone who is worth as much as $7.7 million would tank the US economy in order to profit on such a paltry investment. (As Cantor’s spokesman also pointed out, his $263,000 government pension means he would lose more than he would gain if the government defaulted anyhow).

Cantor is a good target for Democrats, as he is now back in the driver’s seat of his party’s debt limit talks after House Speaker John Boehner was unable to win a large-scale deal. However, if one is to examine Cantor’s finances in search of a motive—and the finances that really matter, his campaign account and leadership PAC—a different story emerges. Cantor, much like the GOP as a whole, is so thoroughly beholden to Wall Street firms it’s hard to imagine he won't agree to a deal by August 2.

Wall Street unquestionably wants a deal done: it told House Speaker John Boehner exactly that in the spring. Master investor Warren Buffet has likened the Republican strategy to a game of Russian roulette, and Alan Greenspan says it’s an “extraordinarily dangerous” situation. Stocks for big banks and investment firms are at fifty-two-week lows, and market concerns over the debt ceiling talks are already playing a role in their poor fortune.

In the last campaign cycle, as Cantor was on his way to becoming majority leader in the House, his campaign committee and leadership PAC took in $1.2 million from securities and investment firms—the entities that could be hardest hit by tremors in the bond markets. They formed, by far, Cantor’s biggest industry support. The next-largest industry contributor, the real estate sector, gave about half that.

Many of the large financial institutions that gave money to Cantor have specifically said the debt ceiling must be raised. Jamie Dimon, the CEO of JPMorgan Chase, said, “If anyone wants to push that button…I think they're crazy.” JP Morgan Chase is among the top twenty contributors to Cantor’s campaign committee and leadership PAC, kicking in $27,800 in the last cycle alone between the company PAC and employee contributions.

An even bigger financial backer for Cantor is KKR & Co., a major private equity firm whose employees gave Cantor $52,600 during the last cycle, making them his fifth-largest contributor. In their first-quarter performance report, KKR & Co. described serious concerns over a failure to raise the debt ceiling.

Failure to raise the debt ceiling “could also limit our ability and the ability of our funds and portfolio companies to obtain financing, and it could have a material adverse effect on the valuation of our portfolio companies and other assets held by our funds,” their statement read. “Under such circumstances, the risks we face and any resulting adverse effects on our business, financial condition and results of operations would be significantly exacerbated.”

Cantor said today that his party’s concession, their only concession, is “the fact that we are voting—the fact that we are even discussing voting for a debt ceiling increase.”

That’s the state of play most everyone agrees upon: the Republicans have constructed a devious but effective hostage situation. But given their deep financial ties to Wall Street, one wonders to what extent they’re really bluffing.

The Paradoxical, Dangerous Balanced Budget Amendment

This week, as the federal debt ceiling battle churns closer to Treasury Secretary Timothy Geithner’s August 2 deadline, there’s increasing talk about an amendment to the Constitution that would require balanced budgets. Senate minority leader Mitch McConnell, a key negotiator in the debt ceiling talks, spoke this weekend about the need to “save our entitlements and our country from bankruptcy by requiring the nation to balance its budget.” Senator Rand Paul now insists a balanced budget amendment must be part of any debt ceiling deal, and said Sunday that he will filibuster any agreement that doesn’t include it. Leading presidential candidate Mitt Romney also said recently that the United States should default on its debt unless Congress passes a balanced budget amendment.

Several media outlets dutifully noted the new turn in negotiations but few actually describe the fundamental, radical shifts in American government required by the proposed balanced budget amendment. It’s crucially important to understand what the new GOP demand actually requires.

The most important thing to know is that if enacted, the balanced budget amendment would actually make a balanced budget impossible. Both the House and Senate versions of the legislation not only mandate a balanced budget starting in 2018 but also mandate how it must be done. Federal spending cannot exceed 18 percent of the national Gross Domestic Product, and there would be a super-majority requirement for any new revenue: in other words, two-thirds of Congress would have to vote to approve any tax increase.

It is not hard to imagine that under a sixty-seven-vote threshold, Congress will simply never raise taxes again. Republicans have made it clear they will not support tax increases in virtually any situation, and most GOP Senators have signed Grover Norquist’s no-new-taxes pledge. So if the government permanently handicaps revenue, how can it possibly achieve a balanced budget, especially as healthcare costs are certain to increase as baby boomers become senior citizens?

It simply might not be possible, which then raises basic questions of enforceability. Say the amendment was enacted, but one year Congress passes a budget where spending exceeds revenues. Would the federal courts rule the budget unconstitutional? And if they did, what then? As Bruce Bartlett wonders, would Americans have to send back their Medicare checks or federal salaries? (Bartlett, a former official in George W. Bush’s Treasury Department, has called the BBA idea “idiocy” and “especially dimwitted.”)

Then there’s the 18 percent spending cap. First of all, given that taxes are basically frozen by the supermajority provision, it’s quite possible that the government won’t even be able to raise revenue equal to 18 percent of GDP, meaning that Congress would have to spend even less than that in order to have a balanced budget. But putting that aside, even spending at 18 percent of GDP would be practically impossible and would require unimaginable reductions in government services.

As Ezra Klein notes, federal spending exceeded 18 percent of GDP every single year of Reagan’s presidency, every single year of George W. Bush’s presidency, and all but two years under Bill Clinton. Not only would the BBA have made Ronald Reagan’s entire economic stewardship unconstitutional, it also would make Paul Ryan’s budget illegal—his plan still forecasts federal spending of 20.75 percent of GDP in 2030.

The only budget proposal that would come close to federal spending at 18 percent of GDP is the ultraconservative plan put forth by the Republican Study Committee. The Center for Budget and Policy Priorities examined that budget, and found that it gets to 18 percent spending with a 70 percent reduction in non-defense discretionary spending by 2021. This is the area of the budget funding everything from “veterans’ medical care, most homeland security activities, border protection, and the FBI…[also] education, environmental protection, protecting the nation’s food and water supply, and medical research, as well as services for disadvantaged or abused children, frail elderly people, and people with severe disabilities.”

Beyond that, the budget raises the Social Security retirement age to 70, makes deeper cuts to Medicare than Ryan’s plan, and cuts $86 billion over ten years from Pell Grants. If the idea is to shrink government “to the size where I can drag it into the bathroom and drown it in the bathtub,” in the words of Grover Norquist, then the BBA is the watery coup-de-grace.

Impossible and unworkable as it sounds, every single Republican Senator co-sponsored the BBA legislation now in the Senate and, as noted, leading GOP negotiators and presidential candidates are demanding it. Calling for a balanced budget makes good politics—a poll released yesterday shows more than seven in ten registered voters support a constitutional amendment to balance the budget.

But the same poll also shows that the support plummets to around 30 percent when the voters are told it would require deep cuts to Social Security and Medicare. This is why the media need to be clear about what the GOP is proposing—the balanced budget amendment is one of the most dangerous soundbites in recent political history. 

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A Stunning Development in the Swipe Fee Debate

Earlier this month, we reported on the Senate battle over “swipe fees,” which banks charge merchants for processing credit or debit cards. It appeared the story was over, and an effort by banks to maintain high swipe fees was vanquished—but an eleventh-hour action by the Federal Reserve yesterday has given Wall Street yet another astonishing victory in Washington.

The average swipe fee in America is 44 cents, the highest rate in the world. In December, the Federal Reserve released an analysis saying that banks could still make profit by charging 12 cents per transaction, and under the Dodd-Frank financial reform, planned to enforce this cap starting today.

Banks—which collect $20 billion every year from swipe fees—naturally did not want this revenue reduced by almost 75 percent. Early this year, they launched a massive lobbying campaign to pass a bill by Senator Jon Tester (D-MT) that would delay the Federal Reserve’s cap. Retailers, who claim high fees drive up prices and hurt the bottom line of small stores, had their own well-funded campaign to defeat the bill, and ultimately prevailed. On June 8, Tester’s bill failed to win a cloture vote.

It was a ridiculously expensive battle, utilizing hundreds of lobbyists and tens of millions of dollars in contributions and advertising. Senator Dick Durbin (D-IL) joked that it was a “full employment” bill, because “everybody who is a lobbyist in Washington is working on this amendment.” Senator Lindsey Graham told the Huffington Post that “everybody and their grandmother’s lobbying on this” and added it was in the “top ten” of brutal and well-funded lobbying battles that he’s seen.

The takeaway was that Wall Street could be defeated in Washington, but perhaps only by an equally well-funded special interest. As it turns out, even that assessment undersold the banks’ influence. Yesterday, less than twenty-four hours before their rules were to go into effect, the Federal Reserve announced it would cap the fees at as high as 24 cents, not 12.

In announcing that the Fed would double the proposed cap, chairman Ben Bernanke said “I think this is the best available solution that implements the will of Congress and makes good economic decisions.” Alongside the Senate fight, Wall Street has also been pressuring the Fed to help them out, and apparently their pleas have been heard.

Even though the 12-cent cap imposed a 75 percent reduction, the profit margin on 12 cents was still 70 percent. When Bernanke spoke of a “good economic decision” by doubling that cap, he could only have been speaking of bank balance sheets.

Moreover, the Fed’s action essentially exempts debit-card swipes from the regulation. As Zach Carter explains at the Huffington Post, the 44-cent swipe fee average is actually a composite of two different averages. When you swipe your card at a store and choose “credit” and provide a signature, the average fee charged by banks is 56 cents. When you choose debit and enter a PIN number, the average fee is 23 cents.

Thus, by capping swipe fees at 24 cents, the Fed is basically freeing all debit card transactions from regulation. Retailers are not pleased. "The Federal Reserve very clearly did not follow through on the intent of the law," Mallory Duncan, chairman of the Merchants Payments Coalition, told Huffington Post. "The [Fed] board members are overwhelmingly bankers, so they decided to take several billion more from the public and give it to the banks,” he added in comments to The Hill.

Duncan also said retailers will be looking at ways to “challenge” the Fed’s ruling. Washington lobbyists, call your office. 

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Implementing the DREAM Act, Piece by Piece

There is virtually no chance the DREAM Act will become law in the current Congress. The bill, which would provide conditional US residency to undocumented high school graduates who are pursuing either a college degree or a military career, died in the last Congress—before Republicans took control of more seats in both chambers. The new Republican House of Representatives would sooner pass a bill rescinding citizenship to children of undocumented immigrants, rather than extending it to anyone.

But the Obama administration is doing what it can to implement the DREAM Act through the back door by refusing to deport many undocumented students. It’s not nearly as effective as the comprehensive DREAM Act legislation—but it does keep talented immigrants in the country, and resembles several similar efforts in a dozen different states.

At a Senate hearing on the DREAM Act yesterday, Secretary of Homeland Security Janet Napolitano explained the rationale behind a recent memo written by Immigration and Custom Enforcement director John Morton, which outlines situations where “discretion” could be used to prevent certain immigrants from being deported, including students. It specifically allows agents and attorneys to consider if a person graduated from high school or is enrolled in a higher education program.

“We simply don't receive the appropriation necessary to remove everyone who is technically removable from the United States. And so we have to set priorities,” Napolitano said. “One of the things we're working on now, is to design a process that would allow us as early as possible, to identify people who are caught up in the removal system, who in the end really don't fit our priorities or in the end, would not be removable.”

As Suzy Khimm notes at Mother Jones, the discretion outlined in the Morton memo goes much further than earlier efforts at discretion during the Clinton administration. “It’s a paradigm shift…it’s the first memo I've seen by an ICE director written in plain English so that a field officer and trial attorney can understand it,” David Leopold, an immigration attorney and president of the American Immigration Lawyers Association, told Khimm. “What he's really saying is, look at the people you run across in the scope of your enforcement work as human beings, not merely as statistics and targets—have they developed ties, have they added to the social fabric and culture, do they have children that depend on them? I applaud him for that.”

Sen. John Cornyn underscored Republican opposition to the DREAM Act and similar executive actions under the Morton memo, asking Napolitano why DHS doesn’t just ask for the necessary appropriations to deport every undocumented person in the United States. Republicans like the Kansas secretary of state have similarly bashed the Morton memo as “the stealth DREAM Act,” but there’s little that Republicans can actually do to stop ICE from exercising such discretion.

Moreover, the Morton memo compliments many similar actions by states to keep talented, undocumented individuals as residents. On Friday, a law will take effect in Maryland that halves tuition rates for undocumented immigrants, and hundreds of undocumented students are expected to apply.

Republicans in Maryland are mounting a furious petition drive to delay or possibly repeal the law before it takes effect, and it appears they might be successful. If the petition signatures are valid, the law will be put up for a referendum later in the year.

But even if the law is delayed in Maryland, eleven other states have similar laws. California allows undocumented students to pay in-state tuition, and a legal challenge to that law was rejected by the Supreme Court earlier this month. Ten other states have similar policies: Illinois, Kansas, Nebraska, New Mexico, New York, Oklahoma, Texas, Utah, Washington and Wisconsin.

These piecemeal efforts will have to do for now, and probably for the next several years--there are twenty-one Democratic Senate seats up for grabs in 2012, compared with only ten Republican seats. The passage of the DREAM Act in the current political climate is just that—a dream.

Additional reporting by Zachary Newkirk

Debt Ceiling Theatrics Get More Dangerous by the Day

Republicans have been playing a double game with the debt limit debate. On one hand, it’s hard to imagine GOP members of Congress actually blocking a measure that would raise the debt ceiling, because that would lead to sudden, dramatic reductions in government functions: there might not be money for Social Security payments, Medicare checks, military salaries and more. Worse, confidence in US Treasury bills would be seriously wounded if the debt ceiling isn’t raised by August 2, meaning economic catastrophe. Voters would blame Republicans for this economic catastrophe, polls show, and House Speaker John Boehner was warned by Wall Street executives in no uncertain terms that he could not allow this situation to occur.

At the very same time, this nightmare scenario is the only leverage Republicans have in the debt ceiling debate. They’re asking for a whole host of policy changes—from dramatic spending cuts to radical changes to entitlement programs—that would otherwise be non-starters with Democrats in Congress and the White House, but Republicans are refusing to vote for a debt limit increase unless these policy changes are approved.  “I must be convinced we have wrung every nickel of spending out of this,” Representative Michael Burgess told World Net Daily.

So far the strategy has worked well for Republicans. Bipartisan talks between the administration and House majority leader Eric Cantor produced tentative agreements to cut $1 trillion from the budget, with Vice President Joe Biden saying he believed the cuts would total as much as $4 trillion. A mandatory and enforceable spending cap may be enacted. Democrats are insisting that tax increases be part of the deal—but only 17 percent of it. The tax increases are targeted to particularly egregious areas, like ending exemptions for private jets or changing rules that allow hedge fund managers to count their income as capital gains, and even though the Bush tax cuts are the number-one driver of the debt, the White House will not insist that a deal that repeals or changes them.

Meanwhile, Obama and Boehner are photographed playing a friendly, back-slapping round of golf. Nothing to see here, folks—the US government is functioning properly.

But over the past week, several GOP actors have upped the ante and painted a very different picture of a government that might not actually be able to solve this problem. And there are potentially serious consequences to this shift.

Not satisfied with having even 17 percent of the debt ceiling deal include tax increases, Cantor and Sen. Jon Kyl walked out of the bipartisan meetings with Biden. Meanwhile, SenatorJim DeMint, who holds powerful sway in the Senate, has said he simply doesn’t believe that the debt ceiling needs to be raised by August 2. This opinion is shared by leaders of national Tea Party organizations and presidential candidate Representative Michele Bachmann. DeMint also says the only acceptable outcome is the passage of a balanced budget amendment, an extreme request that’s almost certain to be left unfulfilled.

This is where the political theatre is getting more dangerous every day. There are serious risks attached to even the appearance that a deal may not happen. As Jared Bernstein explains at his blog, the Treasury Department is currently selling bonds to investors with a relatively low 2.93 percent interest rate. Investors feel comfortable with the low yield because they remain confident that the Treasury bonds are a safe investment. But if that confidence is shaken, investors may demand more, and Bernstein speculates that Treasury might have to add half of a percentage point to the interest rate.

If investors begin to lose confidence in US Treasury bonds like this, there could be serious economic consequences at home, as lending would become even more difficult. At the very least, if the interest rate we’re paying out on Treasury bonds goes up a half-percentage point, that means $50 billion more in annual debt servicing costs—and yes, this would increase the debt and deficit even further.

It’s a bewildering situation. Republicans, who recently voted for a Ryan budget that increases the debt by trillions, are demanding a debt reduction deal that ignores the largest driver of debt—the Bush tax cuts—and the theatrical process they are using to get what they want may itself end up increasing the debt by $50 billion per year.

There may be a deal in the end. But with every passing day of threats and theatrics, the risks get bigger, the debt may get larger, and confidence in the American political system shrinks—with good reason. 

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