What the Stock Market Plunge Means for a Deficit Agreement

In some parallel universe, Congress and President Obama
would respond to the stock market tumble, the S&P ratings downgrade, and
growing public disgust at their toxic inaction on fiscal policy in a simple way:
They’d agree on the broad deficit reduction plan they could not settle on last
month.

The plan would include some short-term stimulus to get the
economy through its current rough patch and a mix of broad reforms in entitlements
and the tax code that would reduce future projected spending and boost
revenues.  Instead of sending reliably intransigent
mouthpieces to sit on the fiscal super committee that was created by the debt
limit agreement, the congressional leadership would use the panel as a
mechanism to reach a sensible agreement.

The odds of this happening remain, sadly, vanishingly small.

The details of such an agreement are hardly a mystery. It
would be, as Obama said in his remarks today, much like what was proposed by
his own deficit commission (the one whose recommendations he ignored for
months) and the Senate’s bipartisan gang of six. And it would be something like
what he and House Speaker John Boehner could not agree on as part of their
failed grand bargain. He might have added that it would also follow the
blueprint proposed by the Bipartisan Policy Center. We have no shortage of budget
frameworks– all remarkably alike.

Wall Street, for all of its whining about Washington, is
hardly helping.  S&P’s downgrade, which
did little more than mix conventional political analysis with appallingly bad
math, may have embarrassed the rating agency as much as its blindness to last
decade’s mortgage mess.

In addition, the recent combination of plunging stocks
and rising Treasury bond prices is no cry for deficit reduction. Indeed,
it seems to be signaling greater fear of a double-dip recession than a government
default.

And don’t forget that Republicans refused to support a broad
fiscal deal in part because of the pressure they felt from many hedge fund partners.
Some of these heavy campaign contributors have been more interested in protecting their
own tax breaks than in fixing nation’s fiscal problems.

Still, the market’s ongoing nervousness would probably motivate Obama to come back to the table, if only he had someone to talk to.  He said today he felt a “renewed sense of  urgency” to confront the deficit. But it may take a few more days of Wall
Street ugliness before he has anybody to negotiate with.