Will both sides blink on the debt ceiling?

This president wasn't elected to abet the dismantling of the New Deal and the Great Society. That's change we can't believe in. But if a stalemate on raising the debt ceiling sets back the recovery, or double dips the economy into renewed recession, Barack Obama may have bigger problems than a damaged re-election campaign.

The Republicans in Congress weren’t elected to acquiesce on tax increases. Ronald Reagan raised taxes after promising to cut them, and repeatedly proposed and signed higher debt limits. Of course, that was then and this is now — before the GOP morphed into a cult. But Republicans are still a party with a House majority that has to be re-elected — and they might not be if they bear a hefty share of the blame for another financial collapse and global economic crisis. Instead of scheming to replace John Boehner as House speaker, House Majority Leader Eric Cantor (R-Va.), a latter day Newt Gingrich, albeit in better shape, could find himself competing for minority leader.

Ineluctable realities suggest that the debt limit negotiations now underway could end in a deal after traversing the political equivalent of "the Perils of Pauline." After deadlocks, walkouts, threats, and partisan intransigence, there are five factors pushing both sides toward an unhappy agreement — which I won’t like, progressives will assail, and the Tea Party will have trouble swallowing — but which is the least bad alternative compared to potentially hundred of billions, or trillions, in lost financial value, and millions of lost jobs.

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Democrats and Republicans are eyeball to eyeball. Time is short. The territory is uncharted. The stakes for jobs, for the economy, and for our democracy itself are high.

First, no one can be certain who would pay the electoral price for this catastrophe. GOP presidential candidates can calculate that voters would punish Obama for the economic pain. They may be right. But surely the White House has a Plan B to pin the blame on Congressional Republicans. If the worst happens, all eyes will turn to the president; for once in this fragmented media culture, he will command the bully pulpit. His narrative could carry the day, and the next year, dooming GOP chances to take the Senate, or even keep the House. Republicans like Senate Minority Leader Mitch McConnell proclaim that their highest priority is to defeat Obama, but self preservation undoubtedly ranks higher.

Second, the president can let the GOP off the hook of Rep. Paul Ryan’s anti-Medicare plan – a hook which Republicans themselves baited, then swallowed, but could choke on in 2012. Obama will never agree to replace Medicare with vouchers. But he can, and likely will, offer "reforms" — for example, trimming reimbursement rates and payments to hospitals, nursing homes, and drug companies. He will pledge that this involves no reduction in Medicare benefits for the elderly. Medicaid is another story, but here, too, he can argue that the cost savings will come from providers, from eliminating waste and inefficiencies. The lobbyists will work overtime to block such measures, but the GOP may find it hard to do this bit of special interest bidding.

The one element of "ObamaCare" that Republicans don’t want to repeal — indeed the Ryan plan relies on it — are the savings already enacted from Medicare. The provisions were cynically and fraudulently denounced as "rationing;" in fact, there is evidence that they are beginning to shift the focus of medical services from quantity to quality — from number of procedures to effectiveness of outcomes.

Democrats will bridle at letting Republicans off the Medicare hook by easing their shift from Ryan to an alternative plan. Still, that seems safer than Democrats having to run next year amid economic wreckage; once more, no one can be sure who would be hit hardest by the falling debris. (And in any case, Democrats would continue to accuse the other side of seeking to "end Medicare as we know it" — since most Republicans in Congress voted in lockstep to do just that. Bring on the ads.)

Third, there are ways to raise additional revenues, despite the fulminations of someone named Grover Norquist, someone most Americans have never heard of, who functions as the anti-tax Torquemada, the unelected ideological grand inquisitor of elected Republicans in Washington. In the end, can the GOP really afford to destroy the full faith and credit of the United States in a last ditch defense of tax loopholes for hedge fund managers and Gulfstream V jets?

In addition, it’s possible to raise taxes without raising taxes — by replacing the current cost of living formula, which keeps individuals paying less in a lower tax bracket for a longer time, with a formula that many economists regard as more accurate. Conveniently, more people would then be more swiftly pushed into a higher bracket and pay more income tax sooner. This would provide cover for Republicans who claim that they hadn’t raised tax rates. Similarly, a deal could lower the corporate tax rate in return for shutting down corporate loopholes. Most companies would be satisfied with that — even if this increased net revenues at the expense of some companies.

Fourth, a change in the cost of living formula could also modulate spending on Social Security and other federal pension programs. This would be the unkindest cut of all for Democrats; over time it would reduce benefits by 3 percent, rising to a 9 percent cut for seniors who live to 95. It’s unfair, but it may also be inescapable: No way would Republicans accept a new cost of living formula applied to taxes that doesn’t also apply to benefits.

This deal, or anything like it, would be unpalatable for both liberals and the Tea Party. Boehner couldn’t round up enough Republican votes to pass it in the House without substantial Democratic support. So as negotiations move toward decision, Nancy Pelosi can no longer be treated as the half-forgotten congressional leader. She will have to be a full participant. And wherever she ultimately stands, enough House Democrats will have to hold their noses and vote for the final product. She might be able to demand something the president wants, too — an extension of the payroll tax holiday, which would boost the economy through 2012. And Obama will bargain to backload the spending cuts and tax rises for consumers so that they take effect as the recovery picks up, rather than draining demand and depressing the economy.

There is a delicate balance here, nearly an impossible one. But the president does hold the high card and so far he has deployed it skillfully. It’s the fifth factor that can make the difference. If Republicans reject all reasonable compromise, Obama could invoke the 14th Amendment’s prohibition against questioning the "validity of the public debt of the United States" — which has already been "authorized by law" through spending measures enacted by the Congress. Thus the president could simply ignore the debt limit. This would provoke a constitutional confrontation unequaled since Harry Truman seized the steel industry during the Korean War. But the industry had standing to sue — its property was being taken — and the suit was won in the Supreme Court. In this situation, legal experts generally agree that no one, including Congress, would have standing to successfully challenge Obama in court. Obviously, the GOP would try to mount such a challenge. As the confrontation unfolded, markets might be destabilized anyway — although certainly to a lesser degree then in the event of a default.

The president has refused to take this card off the table — and that can pressure Republicans to a compromise. At the same time, he’s made it plain that he won’t turn to this nuclear option for the sake of an all-or-nothing Democratic deal — and that can pressure members of his own party to compromise as well.

So a grand bargain just may be struck — even if it isn’t so grand from a progressive point of view. But at least Obama will then have preserved the fundamentals of the social safety net and the prospect of a sustained recovery.

Finally there is truth but no point in insisting that the debt limit should never have been misused as a political and ideological football — that senators and representatives who take their oath seriously should never contemplate crushing the financial credibility of the nation. But we are where we are. Across the negotiating table, Democrats and Republicans are eyeball to eyeball. Time is short. The territory is uncharted. The stakes for jobs, for the economy, and for our democracy itself are high. The question is: Will both sides blink?