With seven days to go before the U.S. hits its debt ceiling deadline, the political and financial crisis appeared to deepen Tuesday, a day after President Barack Obama and House Speaker John Boehner accused one another in nationally televised speeches of failing to negotiate in good faith to avert an unprecedented and catastrophic American default.
Positions seemed only to harden after Obama and Boehner engaged in an extraordinary joust over fiscal issues that have consumed Washington since a large block of first-term members of the U.S. House of Representatives, elected last year under the mantle of the small-government, low-tax Tea Party, returned the lower chamber to Republican control.
Obama said the long and caustic fight was a "partisan three-ring circus." Boehner, borrowing the president's very words, said Obama "would not take yes for an answer."
Obama spoke from the East Room of the White House. Boehner issued his rebuttal moments later from his ceremonial Speaker's chamber in the Capitol. Their words swept through the national television audience just hours after Boehner and Senator Harry Reid, leader of the Democratic-controlled Senate, offered competing legislation to break the deadlock over raising the U.S. Treasury's ability to continue borrowing money to pay its bills after the current $14.3-trillion limit expires next Tuesday.
House vote delayed
The White House has threatened to veto emergency House legislation aiming to avert a default, a pre-emptive strike issued as Boehner laboured to line up enough votes in his own party to pass the measure.
The bill would raise the debt limit by $1 trillion while making cuts to federal spending of $1.2 trillion — reductions that the Republicans' most ardent conservatives say aren't enough. The measure also would establish a committee of legislators to recommend additional budget savings of $1.8 trillion, which would trigger an additional $1.6 trillion increase in the debt limit.
The White House objects to the requirement for a second vote before the 2012 elections.
Is the real deadline Aug. 10?
As Washington legislators scrambled to reach a deal before the U.S. runs out of borrowing room, a report by British bank Barclays on Monday suggested there might be more breathing space than anyone anticipates. The U.S. is on track to hit its $14-trillion debt limit by Aug. 2.
But the bank says higher than anticipated tax receipts mean the U.S. might not go technically insolvent until Aug. 10. That's because the Treasury took in $14 billion more than it anticipated from taxes in the week ended July 15. That surplus might be enough to tide Uncle Sam over until its next large bill (a $22-billion Social Security payment) is due.
House Republicans later said they would postpone a vote on the plan so the bill could be modified.
Representative David Dreier of California said the postponement was necessary because congressional scorekeepers said the bill would not produce the budget savings promised by Boehner when he unveiled it Monday.
The bill was initially expected to go to a vote Wednesday, but Dreier said that the measure could come to a vote as early as Thursday after changes are made.
Senate majority leader Reid said the measure stood no chance of passing the Senate even if it cleared the House. He pronounced it "dead on arrival."
Many have predicted dire consequences for the American and global economies should the United States default on its debts.
But that view is not universal. "In reality, the crisis comprises two separate issues that have been grouped together for political reasons," Richard Koo, chief economist of Nomura Research, said in a note Tuesday.
Congress has increased the U.S. debt limit dozens of times since it was first implemented early in the 20th century, and it could easily do so again, Koo said.
But Republicans — who control the House and are surging in polls ahead of 2012 elections — are using the threat of default as a cudgel against the Obama administration to force through spending cuts to placate the extreme base of the Tea Party.
Koo notes a similar attempt was made in 1995 against President Bill Clinton, just ahead of the 1996 elections where Clinton trounced his Republican rival, Bob Dole, but the Republicans seized control of both congressional houses.
"There is really no problem in financing the budget deficit, but the Republicans control the House of Representatives and are effectively holding the debt ceiling hostage," Koo said.
Some Republicans have convinced themselves that the markets would welcome a default, if it resulted in an even more meaningful cut in the deficit, Koo said.
Canada weighs in
Though dominated by internecine U.S. politics, the issue is important to the global community, including Canada. Finance Minister Jim Flaherty said as much at a press event in Burlington, Ont., on Tuesday.
"This is an issue that has consequences not only for the United States but also for the global economy," he said.
Canada is not an island, Flaherty said, and as such would not be immune to the cascading impacts of a U.S. debt default. "We're a trading nation and it matters to us that our most important trading partner has their fiscal house in order," he said.
Flaherty said he is in regular telephone contact with his U.S. counterpart, Treasury Secretary Tim Geithner. "I know they are fully cognizant of the consequences of failing to arrive at some sort of agreement," Flaherty said.
"I am relatively confident that the U.S. will arrive at a debt ceiling solution in the next few days."
Obama alleged Monday that Republicans are playing politics with the nation's economy. He warned of a "reckless and irresponsible" outcome without a compromise by Aug. 2. He urged Americans to make their voices heard and let their representatives know they support "a balanced approach to reducing the deficit."
Boehner responded that Obama wanted "a blank cheque today" and declared "this is just not going to happen."
Obama and the Democrats see it differently, accusing Tea Party Republicans of putting ideological purity ahead of reality and what's best for the country.
"The only reason this balanced approach isn't on its way to becoming law right now is because a significant number of Republicans in Congress are insisting on a cuts-only approach — an approach that doesn't ask the wealthiest Americans or biggest corporations to contribute anything at all," Obama said.
The president and his Democratic allies have sought a plan that would cut the spiralling U.S. deficit and debt through a package of deep cuts in government spending while increasing tax revenues through revocation of loopholes and the rate cuts for wealthy Americans instituted under former president George W. Bush.
Republicans, under the sway of their Tea Party wing, refuse to even consider higher taxes.
New figures released Monday show that U.S. federal spending as a percentage of GDP is no higher than it has been at various other points in its history — most notably the early 1980s when then president Ronald Reagan had been accused of trying to outspend the Soviet Union into oblivion.
But tax revenues have fallen precipitously since the recession.
The latest measure Boehner and the Republican leadership have presented in the House amounts to an extension until next year. In addition to spending cuts and an increase in the debt limit sometime next year, they have called for a second increase in borrowing authority in 2012 that would hinge on approval of additional spending cuts.
Boehner says the Republican-led bill as it stands has enough support to pass both the House of Representatives and Congress, implying that Obama is the only one standing in the way of a deal.
Obama has said he would not sign a short-term extension of the debt ceiling, but on Monday he stopped short of issuing a veto threat. He wants Congress to approve an increase of at least $2.4 trillion in one vote — most likely so the issue cannot be used as a wedge once again in the lead-up to next year's general elections.
Obama's White House on Monday backed the new Senate Democratic plan even though it omitted Obama's requirement of increased tax revenues. It would raise the debt limit by the $2.4 trillion figure the White House wants and carry the country into 2013, beyond the next election. It calls for $2.7 trillion in federal spending cuts, but assumes $1 trillion of that would derive from the end of the wars in Iraq and Afghanistan.
Echoing the disgust he voiced on Friday when Boehner walked away from talks with Obama, the president said: "The American people may have voted for divided government, but they didn't vote for a dysfunctional government."
Boehner countered: "The president has often said we need a 'balanced' approach, which in Washington means we spend more, you pay more." He then challenged Obama assertion on the status of talks, saying there "is no stalemate in Congress."