Repeatedly over the last few weeks, Wall Street clients have asked me to give odds on a big budget deal this year, one that would knock a trillion dollars or more off of the deficit over the next 10 years and would allow Republicans to support a debt limit increase. I've said I didn't see much chance of a big deficit reduction, but I may have to revise that. President Obama will address the nation Wednesday night to back such a deficit reduction effort. I still wouldn't put more than 33% odds on enactment yet, but that's a big jump from 5%. Starting last fall, I've told my Wall Street clients to expect disruptions to the Treasury markets this spring and a series of short-term debt limit increases as we nibble at the deficit.
This morning, White House Senior Adviser David Plouffe said this on ABC's "This Week With Christiane Amanpour:"
So as we look at the next round here, the president is going to be very clear about his approach. It has to be a balanced approach. As he said, you're going to have to look -- certainly for the wealthiest in this country are going to have to contribute something.
We're going to have to look at how we get more health care cost savings. We already have a trillion dollars in deficit reduction over the last -- next 10 -- two decades with the health care act. We're going to have to look at defense spending. We're going to have to look at more programs here.
Normally, presidents don't take on such risks going into a tough reelection fight . Even if Mr. Obama is secure, there are plenty of Senate Democrats who fear losing their seats and their majority to the Republicans next year. The last thing vulnerable Senate Democrats want to do is to cut Medicare benefits, or cut defense, or raise taxes.
Congressional Republicans want more spending cuts, repeal of ObamaCare, no tax increases of any kind, and a constitutional balanced budget amendment as their price for voting to increase the debt limit. A significant number in both houses of Congress won't vote for a debt limit increase under any circumstances, even if it means economic disaster, which a default surely would.
By the way, continuing to pay interest and principal to Treasury debt holders won't avert calamity at all. Default is default. The rating agencies wouldn't have any choice but to lower our AAA rating, and that would drive up interest rates for a long time -- not a smart thing to do when you have $14 trillion of debt outstanding and plenty more on the way.
I can assure you that raising the debt limit is going to be a lot harder than keeping the government from shutting down. Pushing big deficit reduction now is very risky politically, but if this effort gets traction, the market will like it a lot.