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Party Leaders Dismiss Rival Debt Plans as Debate Hits Home Stretch

July 25, 2011 at 12:00 AM EST
With little more than a week until the U.S. debt-ceiling deadline, lawmakers on both sides of Capitol Hill offered competing plans on Monday on how to avert a crisis. Gwen Ifill discusses the impact on Americans if a deal is not reached with IHS Global Insight's Nariman Behravesh and the Pew Center on the States' Kil Huh.
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GWEN IFILL: With little more than a week until the debt-ceiling deadline, lawmakers on both sides of Capitol Hill offered competing plans today on how to avert a crisis. And, late today, the White House announced that President Obama will weigh in as well, with a prime-time address to the nation tonight.

NewsHour congressional correspondent Kwame Holman begins our coverage.

KWAME HOLMAN: With the most recent hopes of a bipartisan plan fading, House Speaker John Boehner unveiled his own debt strategy this afternoon.

REP. JOHN BOEHNER, R-Ohio speaker of the House: It’s time to get serious about solving America’s problems. And I believe our plan is a good step in the right direction.

KWAME HOLMAN: It would unfold in two stages, first, a six-month, $1 trillion increase in the debt-ceiling, coupled with $1.2 trillion in spending cuts.

Then, a congressional commission would work to come up with an additional $1.8 trillion in cuts, including entitlements and tax reform to raise revenue. But President Obama has ruled out any action that does not raise the debt-ceiling through the end of next year. And speaking today at a meeting of the National Council of La Raza, he stressed again, revenues should be part of any deal.

PRESIENT BARACK OBAMA: People from both parties have said that the best way to take on our deficit is with a balanced approach, one where the wealthiest Americans and big corporations pay their fair share, too.

KWAME HOLMAN: Meanwhile, the leader of the Democratic majority in the Senate, Harry Reid, has been working on a competing proposal. It would raise the debt-ceiling and cut $2.7 trillion in spending. The savings would come from federal agencies and defense spending, but avoid controversial changes to entitlement programs and the U.S. tax code.

SEN. HARRY REID, D-Nev. majority leader: So now all the Republicans have to do is say yes. Unfortunately, the Republicans who used to run the Congress on the two Republican caucuses are being driven by the radical right wing that is so in tune with the Tea Party.

They want their leaders to ignore the American people, as they’re doing. They want their leaders to ignore the business leaders like the Chamber of Commerce that they’re ignoring. And even a majority of Republicans around this country want something to happen, and they’re refusing to do that.

KWAME HOLMAN: This afternoon, Reid’s plan got official endorsement from the White House spokesman, describing it as a reasonable approach. The White House statement also said, “We hope the House Republicans will agree to this plan, so that America can avoid defaulting on our obligations for the first time in our history. The ball is in their court.”

How the continuing threat of default could affect average Americans also has been the subject of debate on both sides.

BARACK OBAMA: Are we a nation that asks only the middle class and the poor to bear the burden, after they have seen their jobs disappear and their incomes decline over a decade? Are we a people who break the promises we have made to seniors or the disabled, and leave them to fend for themselves?

SEN. JON KYL, R-Ariz. minority whip: So, when you raise the top two brackets, you’re not just going to hit the millionaires and billionaires. You’re also going to hit a lot of other Americans that don’t report incomes of over a million dollars a year.

KWAME HOLMAN: But for some Americans, the long process toward getting a deal done is breeding frustration with Washington.

WOMAN: Turn off the A.C. inside the building until they get it figured out. They will get it figured out quickly then.

WOMAN: If Congress does not do their job, they’re going to really need to get out of the kitchen, because it’s going to be very hot.

(BELL RINGING)

KWAME HOLMAN: Meanwhile, global financial markets appeared somewhat uneasy that any debt ceiling deal seems to be going down to the wire.

Secretary of State Hillary Clinton sought to calm fears this morning.

SECRETARY OF STATE HILLARY RODHAM CLINTON: So, I’m confident that Congress will do the right thing and secure a deal on the debt-ceiling and work with President Obama to take the steps necessary to improve our long-term fiscal outlook. Through more than a century of growth, the American economy has repeatedly shown its strength, its resilience, and its unrivaled capacity to adapt and reinvent itself. And it will keep doing so.

KWAME HOLMAN: At the end of the day on Wall Street, the Dow Jones industrial average lost 88 points to close at 12,593, and the Nasdaq fell 16 points to close at 2,843.

GWEN IFILL: So as Washington struggles for a solution, what might Americans have to fear if an agreement isn’t reached in time?

For that we’re turned by — joined by Nariman Behravesh, chief economist at IHS Global Insight, an economic and financial forecasting company, and Kil Huh, director of research at the Pew Center on the States.

Nariman Behravesh, we are talking about consequences tonight. We seem to move a few steps forward, a few steps back. Which of the consequences do we keep hearing about are theoretical and which ones are real?

NARIMAN BEHRAVESH, IHS Global Insight: Well, I think a default is theoretical, in the sense that the Treasury Department would not default on our interest payments. That would be a top priority.

So I don’t think there will even be a technical default. That’s the least likely of all the scenarios. The most likely, if in fact we go past the August the 2nd deadline, is in fact slashing all kinds of spending, including, one has to say, Social Security, because there’s a 40 percent gap between revenues and spending. That’s a big gap. It means a lot of programs would be cut.

That would drive the U.S. into a recession. I think that’s a much more likely scenario than a default scenario. It just seems inconceivable that the Treasury Department would not pay on our debts. That would — that would create all kinds of havoc financially here and globally. So I don’t think they will do that.

GWEN IFILL: Well, let me ask you one other question in addition to that, Mr. Behravesh, which is that, as of Friday night, people said, well, when the markets open on Monday morning, there is going to be a big effect because of the deal that fell apart on Friday night. Yet we didn’t see that much of an effect. Why is that?

NARIMAN BEHRAVESH: Well, I think that a lot of people are second-guessing how financial investors and financial markets are going to react.

And they have been wrong and wrong again. Most of the markets are a little jittery, a little nervous, but they’re not panicked yet. I think the heat will get turned up, as it were, as we head closer to August the 2nd. But right now, I would say markets are nervous, but not panicked.

GWEN IFILL: Well, nervous, but not panicked.

Let’s talk about the state, because a lot of this trickles down in lots of interesting ways, beyond what is happening in Washington and beyond what’s happening in Wall Street. Are there states who are bracing for any kind of impact?

KIL HUH, Pew Center on the States: They are.

What you have to remember is, if the federal government defaults, the safest government asset worldwide would get downgraded by the major credit agencies. And that is going to have a downstream affect. It could become much more difficult for states and localities to borrow. They might have a lack of access to the market or they might pay more in order to borrow in the long-term if a federal default takes place.

GWEN IFILL: When we hear ratings agencies threatening to — or at least considering downgrading the federal debt, how does that affect the states?

KIL HUH: Well, you have to remember, states borrow for economically productive purposes, by and large. They are very different than the federal government. The federal government borrows to operate, to keep the lights on and the doors open.

But the federal — but the state governments and the local governments borrow for financing of long-term projects like bridges and tunnels and infrastructure and things of that nature. Those projects are economically productive. They create jobs in the communities.

And if they have to postpone those projects because they can’t access the credit markets in an affordable way or they can’t access them at all, that’s going to have a consequence for them.

GWEN IFILL: How tightly — tightly is their ability to borrow tied to the federal ability to borrow?

KIL HUH: Well, as I mentioned, the federal government is — the U.S. treasuries are the safest asset worldwide.

GWEN IFILL: Right.

KIL HUH: Fifteen other states out of the 50 have a AAA rating like the federal government, but Moody’s, as well as other credit agencies, have said that they would put even the AAA-rated states under review if the federal government were to default and then subsequently get downgraded.

There are states whose economies rely on federal spending and have a large concentration of federal facilities, employees and things of that nature. So it’s going to have an impact.

GWEN IFILL: Mr. Behravesh, let’s talk about consumer lending, because a lot of people think when the — how can this affect me? They think, will my credit card interest rates go up? Will my mortgage go up? Should I take my money that I’m saving for retirement and put it someplace else?

Is there a connection there?

NARIMAN BEHRAVESH: There is a connection — or a potential connection — in the sense that if the U.S. were to default, then we would see a big spike in long-term interest rates, so that would affect mortgage rates. It would affect car lending rates. It would affect business lending rates. So all of that could be quite problematic for the whole economy.

So that’s why the — you know, certainly the Treasury Department and, one has to say, the Federal Reserve as well, very worried about this and want to avoid this at all costs.

GWEN IFILL: Does it have to actually occur or, is merely this delay, this debate, is that already putting its own drag on these areas of the economy?

NARIMAN BEHRAVESH: Well, so far I would say the uncertainty about what is exactly going to happen, what’s going to get cut, what could be affected is giving a lot of consumers and businesses pause, if you will.

It’s making them quite risk-averse. And one of the reasons we’re going through a soft patch — it’s not the only reason — one of the reasons is this uncertainty. And what that is triggering is sort of risk aversion, if you will, on the part of businesses and consumers. So already in a sense, as you’re saying, they’re anticipating or worried about what might happen and pulling back.

GWEN IFILL: Mr. Huh, as we sit here tonight, part of the debate that is happening in Washington is whether any solution should be a short-term solution or a long-term solution. The president has said he will not sign anything that doesn’t take us past the next election. And a lot of folks on the Hill are saying, well, no, we just want to get maybe toward the end of the year.

Does it matter?

KIL HUH: I think it does. States are required by law, their own constitutions, to balance their budgets at the beginning of every year. Vermont is the only exception, but they in fact make that a practice.

They just engaged in four years of very difficult cuts and tax increases in order to close $480 billion worth of shortfalls. And there’s a lot of uncertainty in the air. So if the federal government defaults and essentially has to prioritize payments moving forward, that uncertainty is going to have an impact on states and their ability to deliver important services like health care and education to their communities.

GWEN IFILL: Well, let me ask you this and then I will ask Mr. Behravesh as well, whether, as we sit at this moment waiting to decide whether — to see whether a deal can be struck, is there a contingency plan that ought to be in place or that can be in place that can stop us from going over the cliff here?

KIL HUH: Well, I don’t know about going over the cliff. But states are certainly putting in contingency plans. Treasurer Lockyer of California has asked actually banks to give them, the state, a $5 billion line of credit, because he knows he is going to have some cash flow difficulties if the federal government were to default.

Gov. McDonnell in Virginia, for example, has made arrangements with the state’s own treasury to cover the federal portion of Medicaid should the federal government goes into a default and it’s not able to transfer that money to the states. So states are putting in plans, but at the same time the uncertainty is very real. And a lot of states, much like the Center on the States, is watching this discussion very carefully.

GWEN IFILL: Mr. Behravesh, what about that? In the long — in the broader sense, what kind of contingency plans are people putting in place or should they be putting in place?

NARIMAN BEHRAVESH: Well, I think the contingency plans that we’re keeping on an eye are in fact those of the Federal Reserve, because if you consider a situation where we might default or would default and the markets panic, in effect, and there is a sell-off in U.S. government bonds, which is what the result would be, the Fed indirectly, but going into the markets, could easily buy a lot of government securities and prevent that sell-off or at least limit the damage from that sell-off.

So I’m — we’re quite convinced that the Fed already has contingency plans in the event that something like this happens. And it’s trying — its goal, of course, is to minimize the economic damage from something like this.

GWEN IFILL: We have heard Ben Bernanke, the chairman of the Fed, talk about the catastrophic potential here, but we haven’t heard him say that — what he would do. Do you think that’s even part of the plan?

NARIMAN BEHRAVESH: Oh — oh, very much so. He’s going to keep his powder dry. He’s going to keep his cards close to his vest, but there’s no debate that the Fed has probably multiple contingency plans for a situation like this.

They do not want the U.S. economy to — to be driven back into a recession because of essentially bickering in Washington.

GWEN IFILL: Nariman Behravesh of the IHS Global Insight — we wanted to get that right — and Kil Huh of the Pew Center on the States, thank you both very much.

KIL HUH: Thank you.

NARIMAN BEHRAVESH: Thank you.