As Super Committee Deadline Approaches, Talks Near Collapse

With less than four days until the deadline for a debt-reduction deal, the political climate late Sunday night on the super committee and on Capitol Hill is not encouraging -- gridlock permeates the air as Democrats and Republicans remain far apart on the key issue in the talks: tax increases.

Congressional Democrats want a tax increase on upper-income and uber-wealthy adults, while Republicans not only do not want a tax increase -- they want to extend the 2001 Bush income tax cut.

Republicans have agreed to up to $300 billion in revenue increases via the tax cut change/tax code reform -- but it's an offer Democrats called totally unacceptable and a non-starter, given the size of entitlement cuts Republicans want to make to Medicare, and possibly to Social Security.

If Democrats and Republicans cannot agree by Wednesday night on a debt deal, $1.2 trillion in automatic, draconian cuts -- equally split between social programs and defense -- will take effect. The cuts would start in 2013.

The current climate points to no deal, due to the fact that each side has started to implement that old Washington stand-by in the highly polarized, partisan globalization era that began in 1992: the blame game, The Washington Post reported Sunday.

As long as we have some Republican lawmakers who feel more enthralled with a pledge they took to a Republican lobbyist than they do to a pledge to the country to solve the problems, this is going to be hard to do, U.S. Sen. Patty Murray, D-Wash., co-chairwoman of the 12-member special Congressional committee on deficit reduction, said on CNN's State of the Union Sunday

Conversely, U.S. Rep. Jeb Hensarling, R-Texas, the other co-chairman, said it was Democratic inflexibility that led to the stalemate:

Unfortunately, what we haven't seen in these talks from the other side is any Democrats willing to put a proposal on the table that actually solves the problems, Mr. Hensarling said on Fox News Sunday.

Washington's Curious -- But Hardball Politics Lead the Way

To the typical American, and the typical investor, the above looks like another chapter in adults in politics behaving badly, and the conclusion is warranted: intelligent, educated, mature and reasonable professionals should be able to find common ground and compromise on other points to resolve the crisis and move the nation forward.

However, as anyone who has worked on Capitol Hill -- particularly since the globalization era began with the end of the Cold War -- knows, intelligence, education, maturity and reason often have very little to do with public policy formation in Washington.

Assessing the political costs of a deal have a great deal to do with public policy formation in Washington, however, and right now the sad reality is that both Democrats and Republicans see the political cost of reaching a debt deal as greater than the cost of not doing a deal. Hence, barring a change in objective events, a deal is not likely.

Political/Public Policy Analysis: What might represent an objective event that would re-focus both the Democrats and Republicans? Tumult in bond, stock or currency markets, starting Monday.

As of Sunday night at 8 p.m. EST / New York time, the markets were relatively calm, with Asia's stock markets down about 1 percent in Monday morning trading. Meanwhile the dollar was firm against the euro at $1.3523 and the 10-year U.S. Treasury note was virtually unchanged at 1.98 percent.

Further, if Italy's new Prime Minister Mario Monti can present a credible package of reforms to Parliament that's also capable of passage, the markets should remain relatively calm. However, if Italian lawmakers balk or present other hurdles, the bond vigilantes in the bond market could take that as a sign of a possible default by Italy, and markets could start to roil as early as mid-Monday. And if the latter is the case, a 1,000-point drop in the Dow Jones Industrial Average and/or other bond market jitters are events that could re-focus Democrats and Republicans in Washington toward hammering out a debt-reduction deal like no other.