“Say, my love, I came to you with best intentions,
You laid down and gave to me just what I'm seeking.”
- Dave Matthews, “Two Step”
Conclusion: The Boehner and Reid plans are very different structurally. We expect the Boehner plan to pass this afternoon, which will provide strategic advantage for the Republicans heading into August 2nd.
As Keith noted in the Early Look, the top three stories on Bloomberg this morning related to the debt ceiling. Admittedly, this story is being over-analyzed and over-studied, but we did want to spend a few minutes highlighting the two most recent plans from Senator Reid and Speaker Boehner and the details therein.
As we highlighted in a note earlier this week, the primary outstanding issue relates to timing. The Republicans, led by Boehner, are recommending a two-step process. The first step of the process would involve extending the debt ceiling by $900BN or so, which would be matched by comparable discretionary spending cuts over ten years (duration mismatch, anyone?). The next tranche of a debt ceiling increase of $1.6 trillion would be tied to Congress passing an additional deficit reduction bill that attempts to remove an incremental $1.8 trillion in expenditures related to cuts in mandatory spending programs. These mandatory spending cuts are to be determined by a 12-member joint leadership committee.
The plan from Reid has a number of noteworthy differences from the Boehner plan. First, the Reid plan is not two-step in nature. Second, while the Reid plan proposes $2.2 trillion in deficit cuts, the bulk of the cuts in this plan actually come from an assumed winding down of the Iraq and Afghanistan military adventures. In fact, of the total proposed cuts by the Reid plan, more than $1 trillion come from a wind down of Iraq and Afghanistan.
In the table below, we compare the revised Boehner plan versus the Reid plan as scored by the CBO and based on our interpretation:
While the primary issue between the Democrats and Republicans remains one of timing, the underlying issue, as outlined in the table above, is the exact source of cuts. The Republicans don’t count the natural winding down of wars as a cut in spending, a stance which is consistent with CBO scoring standards. On the other hand, Democrats are using the wind down of military spending as the primary component of the deficit reduction plan. This debate over source of spending cuts is the primary reason that Republicans are pushing for a two-step process. If the Republicans agreed to the Democratic plan, they would in fact be ceding away much of their long term budget cuts proposals.
This is not a political statement per se, but we think Speaker Boehner characterized the current political impasse best with the following quote from yesterday:
“There are only three possible outcomes in this battle: President Obama gets his blank check; America defaults; or we call the president’s bluff by coming together and passing a bill that cuts spending and can pass in the United States Senate. There is no other option.”
The vote on the Boehner plan is scheduled for 5:45pm today, after the markets close. The House Republicans, led by the Tea Party Caucus, are adamantly opposed to giving the President any sort of blank check, and so will certainly call the White House hand on the veto threat and pass this bill. In fact, there is risk that Boehner can’t get the votes he needs this afternoon, though the most recent information we’ve received suggests that he will.
If the Boehner plan does indeed pass this afternoon, the bill then goes onto the Democratic controlled Senate and then, if passed, onto the President to sign, or veto. From a strategic perspective, the Republicans have positioned themselves well as the proverbial budget ball will be in the hands of the Democrats in the five days leading up to August 2nd.
The political theater is about to get very interesting in Washington and, despite his veto threat, President Obama may be out on the dance floor doing the two-step in the next couple of days.
Daryl G. Jones
Director of Research