Mike Shedlock

Updated:

WASHINGTON, DC - House Speaker John Boehner (R-OH) released the following statement today regarding ongoing debt limit discussions with the White House:
 
"Despite good-faith efforts to find common ground, the White House will not pursue a bigger debt reduction agreement without tax hikes. I believe the best approach may be to focus on producing a smaller measure, based on the cuts identified in the Biden-led negotiations, that still meets our call for spending reforms and cuts greater than the amount of any debt limit increase."

From James James Pethokoukis at Reuters: "A GOP congressional source was a bit less diplomatic, telling me Saturday afternoon via email:

Their fierce insistence on higher taxes is beyond bizarre. After months of demanding ‘clean’ increase to avert economic calamity (default), WH threatens economic calamity (default) unless they get economic calamity (trillions in tax hikes). No wonder these guys are governing over an economic calamity (9.2% & growth malaise), w/ an economic calamity on the horizon (debt explosion as mapped out in president’s budget). The bipartisan consensus on tax reform (broader base & lower rates) was championed by President’s fiscal commission, and yet now is being rebuked by the President. Lowering top rates that would help make America more competitive was too large a leap for a true class warrior.

Indeed, as negotiations wore on, Obama got tougher on taxes (pushed hard by the hard left), and the deal he was cooking up almost certainly wouldn’t have been revenue neutral as he tweaked rates and reduced tax deductions. Not even close. Nor did it help that Obama reportedly balked at a spending-cut trigger if certainly tax reforms were not completed."

Conflicting stories from Reuters and the New York Times suggests that the sides are at least still talking. However the miserable jobs report on Friday complicates matters. Democrats now want more stimulus, and stimulus will add to the deficit.

Reuters reports 
Boehner says chance of budget deal "maybe 50-50"

Speaker of the House of Representatives John Boehner told his Republican members on Thursday that chances of reaching a budget deal within the next few days "was maybe 50-50," a party aide said.

"Whether or not it happens is really dependent on whether they (Democrats) continue to insist on tax hikes" over Republican objections, the aide said. Boehner offered his assessment at a closed-door meeting with members shortly before White House talks with President Barack Obama and other congressional leaders.
Interestingly, the New York Times says Boehner has agreed to some tax hikes but Republicans and Democrats Still ‘Far Apart’ on Debt, 2 Sides Will Seek Broader Cuts
Though the president and Congressional leaders did not close wide gaps on the issues of spending cuts or new tax revenues, officials briefed on the talks said, they emerged with a consensus to aim for the biggest possible deal — one resulting in up to $4 trillion in savings — and a recognition of the dire consequences of not acting before Aug. 2, when the government will lose its authority to borrow.

Later, top lawmakers and Congressional officials said that they thought a narrow opening existed for a far-reaching agreement, and that the next 48 hours and the Sunday meeting would prove pivotal. If an acceptable package cannot be agreed upon, they predicted a fallback plan in the range of $2 trillion or more, based on the earlier negotiations overseen by Vice President Joseph R. Biden Jr.

With the White House and the lawmakers promising not to divulge details of the talks, the specifics of an eventual deal were not yet clear. But Mr. Obama has put popular entitlement programs like Medicare and Social Security on the table, while Speaker John A. Boehner has signaled for the first time his openness to up to $1 trillion in new revenues. The money could presumably be raised through closing loopholes but would also probably require changes to the tax code that would have to be worked out later.

The prospect of cuts in health care benefits and Social Security has alarmed Democrats. On Thursday, Representative Nancy Pelosi, the House Democratic leader, said she wanted to give the president room to negotiate a broad agreement but would resist efforts to tie the deal to Social Security.

“Do not consider Social Security a piggy bank for giving tax cuts to the wealthiest people in our country,” Ms. Pelosi said to reporters on Capitol Hill after the meeting. “We are not going to balance the budget on the backs of America’s seniors, women and people with disabilities.”

The White House took pains on Thursday to play down reports that Mr. Obama was open to substantial cuts in Social Security benefits as part of a deficit-reduction deal. The press secretary, Jay Carney, said that the president had vowed in his State of the Union address in January to put Social Security on a firmer footing, and that he would not place the subject off limits in negotiations to reduce the deficit.

Among the proposals is an adjustment to the price index that measures cost-of-living increases, which would whittle its payments to recipients over time.

Mr. Obama, seated between Mr. Boehner and the Senate majority leader, Harry Reid of Nevada, told the lawmakers he would not sign an interim deal, only one that extended through the 2012 election.

Then he surveyed the eight leaders about their preference for three deals of different sizes — the largest being up to $4 trillion in deficit reduction over the next decade, according to aides briefed on the discussion.

Six of the eight expressed their support for the biggest deal, the aides said. But Representative Eric Cantor, the House majority leader, and Senator Jon Kyl of Arizona, the ranking Republican on the Senate Finance Committee, favored the midrange $2 trillion, voicing doubts about how they could sell a $4 trillion deal to their rank and file, officials said, since it would involve tax increases.
Jobs Report Muddies Picture

Bloomberg reports 
Democrats Press Obama to Include Stimulus in Debt Deal After Jobs Report
Democrats pressed for some form of economic stimulus in the debt deal President Barack Obama is negotiating with Republicans following a U.S. Labor Department report yesterday showing job growth slowing.

Senator Charles Schumer of New York, the chamber’s third- ranking Democrat, called for an “immediate jolt” to the economy by extending and enlarging a one-year payroll-tax cut that’s set to expire Dec. 31. He asked for action “as quickly as possible by including it in the final debt-limit agreement.”

Jared Bernstein, until recently Vice President Joe Biden’s chief economic adviser, predicted the White House would step up efforts to include in the debt deal additional infrastructure spending or a new temporary payroll tax reduction.

Republican presidential candidate Mitt Romney said the “abysmal jobs report confirms what we all know -- that President Obama has failed to get this economy moving again.”

Former Utah Governor Jon Huntsman, also a Republican presidential candidate, said “extremely anemic job creation” demonstrates “we need free-market, pro-growth policies to spark a wave of job growth.”

Another temporary payroll tax cut will not create any jobs. No one will hire anyone for a promise of lower taxes.

Budget Deficit Math

The budget deficit is somewhere between $1.4 and $1.6 trillion a year. Cutting $2 trillion over 10 years is not even a down payment for what needs to happen. Heck, $4 trillion is barely a reasonable down payment.

I much prefer a $4 trillion deal than a $2 trillion one. Then regardless of what the deal is, I would slash another $2 or $3 trillion over 10 years out of defense spending.

Any deal that hits $4 trillion probably will include some small tax hikes. So be it. The ratio of 3-to-1 or 3.5-to-1 budget cuts vs. tax hikes seems like a reasonable compromise to me.

Republicans should take the opportunity to slash $8 trillion ($800 billion a year) out of the deficit if Democrats are willing to stick to those ratios I mentioned.

How to Tell if the Deal is a Good One

The deal will not be a good one if it is all back loaded. Nor will it be a good deal if it cuts less than $4 trillion. We need huge cuts this year and every year forward, not back-loading that may never happen.

Slashing $400 billion would have Krugman whining. Slashing $800 billion would have Krugman and the Keynesian clowns howling like mad.

In general, the louder Krugman howls, the better the deal it will be.

Helping Cities, States, Municipalities 

Unfortunately, what I proposed above does nothing for states. Cities, states and local governments need relief as well. The way to help cities and states is to kill collective bargaining for public unions and scarp Davis-Bacon.

Those two acts will lower costs, spur hiring, and reduce layoffs. Unfortunately, those actions do not appear to be under discussion.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Watch for periodic updates to this breaking news story.


Mike Shedlock

Mike Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management.