WASHINGTON -- Hours ahead of his first meeting with President Barack Obama aimed at jump-starting stalled deficit talks, Senate Minority Leader Mitch McConnell (R-Ky.) is already drawing a line in the sand for the president: No deal if tax increases and stimulus spending are in the mix.
"Later today, I will sit down with President Barack Obama to discuss his request to increase the nation's debt ceiling," McConnell wrote in a Monday op-ed for CNN.com. "And I will make a request of my own: What, Mr. President, are you prepared to do about the massive deficits and debt that have grown dramatically on your watch?"
“What Republicans want is simple: We want to cut spending now, we want to cap runaway spending in the future and we want to save our entitlements and our country from bankruptcy by requiring the nation to balance its budget,” McConnell said. "The Democrats' response has been a mystifying call for more stimulus spending and huge tax hikes on American job creators. That's not serious, and it is my hope that the president will take those off the table today so that we can have a serious discussion about our country's economic future."
Monday's meeting marks the first time Obama and McConnell are getting directly involved in bipartisan talks to strike a deal on a $2.4 trillion deficit reduction package. Biden had been leading talks on the issue for weeks until last week, when House Majority Leader Eric Cantor (R-Va.) pulled out of the group and said it was time for Obama to step in to break an impasse on tax increases.
Thus far, Republicans have refused to allow new revenues to be part of the deal, while Democrats insist that spending cuts alone aren’t fair. Instead, Democrats are calling for new stimulus spending on infrastructure and clean energy jobs, as well as eliminating Bush tax cuts for millionaires and closing overseas tax loopholes for U.S. corporations.
But McConnell said "the obvious solution" is deep spending cuts -- in particular, Republicans have called for cuts to Medicare -- and said Democrats' arguments for more stimulus spending fall flat given the success of the American Recovery & Reinvestment Act, the $830 billion stimulus package passed in 2009.
"When Democrats passed [ARRA], they made two predictions: first, that it would keep unemployment below 8 percent, and second, that it was a one-time cash infusion meant to prevent a wider crisis. Two years later, unemployment hovers above 9 percent, and Democrats now demand that we add new stimulus funding," said the Kentucky Republican.
"Americans didn't elect dozens of additional Republicans to the House of Representatives last November because they wanted their taxes raised. They sent them here to reverse the runaway spending policies that failed."
The deficit talks are being fueled by an increasing sense of urgency as negotiators inch closer to Aug. 2, when the government is expected to hit its debt limit -- or essentially run out of money to pay for its bills. White House Press Secretary Jay Carney regularly says allowing the nation's debt to default would be "Armageddon-like" and "catastrophic," but Republicans maintain they will not vote to raise the debt limit without tying the vote to a deficit reduction package.
Senate Majority Leader Harry Reid (D-Nev.) also entered into talks Monday. He met privately with Obama and Biden in the morning, ahead of their meeting with McConnell.
What happens if the U.S. defaults? See the slideshow below.
If the U.S. starts defaulting on its debt, everybody who owns U.S. stocks and bonds will take a big hit. This will affect the big banks, corporations and even countries -- pushing some toward bankruptcy. That's the kind of slide that can spark a panic. On a more personal note, your 401(k) and/or pension will suffer big losses. It could take a long time to rebuild those funds, delaying retirement -- or making it impossible.
Because the global banking system has such a big stake in U.S. assets and the dollar, it will essentially grind to a halt until the U.S. raises the debt limit. At that point, our usual ways of purchasing things -- including credit and loans -- will be unavailable. You can get and use cash, but it will essentially be Monopoly money for a while, due to hyperinflation.
With the global banking system in free-fall, nobody will be lending money for a while. You can't make big-ticket purchases (like a car or college education). And companies that have lost all their U.S. assets won't be able to get loans to cover their day-to-day operations if the commercial paper market -- where companies lend each other money overnight -- seizes up.
When businesses and corporations lose their money and can't get a loan to function, they have to cut somewhere -- and that somewhere could be you. In other cases, planned expansions and new hires might be pushed back, slowing down economic progress.
When the banking system does get back on track, it will still be more expensive and difficult for business owners, the government and regular people to borrow money or buy goods on credit. That drives up the cost of our debt, both personal and the one the government owns. When interest rates go up, the value of bonds you hold in your 401(k) goes down.
Treasury Secretary Tim Geithner warned congressional leaders that failure to raise the debt limit could stop, limit or delay military payments. "This would cause severe hardship to American families," he said, "and raise questions about our ability to defend our national security interests."
Those who rely on Social Security to pay their bills may well need to rely on family or government assistance (if it's still available) to get by. Social Security has a multi-trillion-dollar trust fund that ensures it will be able to pay out benefits for decades. But that trust fund is invested in special Treasury bonds, which will almost certainly plummet in value if the U.S. starts defaulting on other debts. The result could be a major cash crunch for seniors.
As the value of the dollar drops here in the U.S., it will become virtually worthless in other countries. If you're planning a vacation or business travel outside the U.S., it's going to get a lot more expensive.
If the federal government fails to pay the bills associated with Medicare, then hospitals, doctors and other medical service providers will not be paid. This could drive up the costs of health care -- and make it less available to those in need.
If the U.S. stops paying its bills, the rest of the world will get pretty upset. Even after debt repayment eventually restarts, China and Europe will be wary of lending more money to America -- and when they do, it will be at much higher rates.