With two weeks to go before a self-imposed deadline, deficit talks led by Vice President Joseph Biden have entered the serious bargaining phase, with a few glimmers of hope but large areas of deep disagreement.
Congressional negotiators continue to believe they are making substantial progress in coming to an agreement among themselves by Independence Day, but the nagging question remains whether they will be able to sell whatever comes out of their talks to the fickle and intensely partisan rank and file in both chambers.

“I think the idea is that we would either reach an agreement in principle by [July 4] or recognize that we’re not going to be able to bridge our differences,” Rep. Chris Van Hollen said last week. The Maryland Democrat, who represents the House minority in the negotiations along with Assistant Minority Leader James Clyburn (S.C.), cautioned later, “We’ve got a long ways to go here before we resolve the toughest issues.”

Negotiators admit they have something to prove to the jittery stock market, even as they are careful not to promise anything specific.

“At the end of the day, we’re going to have to decide what is good for the country that actually gets the rest of the world saying these guys … are on the right track. … They’ve tackled a significant political dilemma and they’ve solved it, like we used to,” Biden said last week. “What is the, you know, the shtick out there? This is a dysfunctional place, can’t get anything done. The single most important thing to do for the market is convince them that no, that’s not true.”

Biden was alluding to the belief held by many policymakers and economists that both Democrats and Republicans are playing a dangerous game, given that a failure to raise the debt limit would not only shut down the U.S. government, but also would have catastrophic consequences for the world economy. Treasury Secretary Timothy Geithner has said he expects the U.S. to default on its obligations by Aug. 2 if the limit is not increased.

But last week, Biden insisted the tough negotiating had begun, with Democrats in the room saying they were willing to give in to some Republican demands for cuts if the GOP agreed to trim military spending and increase revenues.

But the two sides have yet to make a breakthrough on the thorniest issues — with Republicans wanting deep cuts to Medicare and Medicaid and Democrats demanding that the GOP agree to raise taxes. Both issues are seen as political poison among liberals and conservatives, respectively.

In the end, Biden predicted that any deal will require both Republican and Democratic votes to pass because there are Republicans who are demanding “60 zillion” dollars in cuts and will never be satisfied and there are Democrats who won’t vote for any cuts.

Still, the final deal “has to be real,” with a significant down payment and a believable path to getting to $4 trillion in deficit reduction during the next decade, Biden said.
The two sides are starting by forging tentative agreements on smaller spending cuts that are contingent on a larger deal. Or, as Biden put it, “I’ll trade you my bicycle for your golf clubs.”

The group is expected to hold three or four three-hour meetings this week as it races toward the unofficial July 4 goal. That is somewhat fungible, however, given Geithner’s Aug. 2 deadline.

Indeed, Senate Majority Leader Harry Reid (D-Nev.) in a PBS interview Friday urged the Biden group to work through the July Fourth recess if they haven’t reached a deal before then.

Each side has shown some notable movement during the past few weeks, but both sides continue to insist that some things are off the table.

Democrats have shown a willingness to find savings in Medicare and Medicaid and a host of other programs — although they are resisting direct cuts to beneficiaries — provided Republicans show a willingness to eliminate some tax subsidies and loopholes.

Democrats also said they grew more hopeful that a deal could be reached after 34 Senate Republicans voted to eliminate the ethanol tax break last week.

“It established the principle that you can close special-interest loopholes and use the revenue for deficit reduction, which is exactly what we said needs to happen,” Van Hollen said.

The No. 3 Senate Republican, Lamar Alexander, said he’s not sure getting rid of tax breaks will be a part of the Biden agreement, but he allowed that after the Senate voted 73-27 to get rid of the ethanol tax subsidy, others should be eliminated at some point as well.

“Anytime you have $1.2 trillion in so-called tax expenditures … there are probably several hundred billion dollars of those that may be unwarranted, and one appropriate use for stopping unwarranted tax breaks is reducing the debt,” the Tennessee Republican said.

Alexander said he thinks most people agree. “If I walked up and down the street in East Tennessee and said, ‘Do you think it would be a good idea to get rid of an unwarranted tax break and use the money to reduce the debt?’ I bet 99 out of 100 people would say that’s a really good idea,” he said.

But such talk is heresy to groups such as Grover Norquist’s Americans for Tax Reform, and it’s not clear yet whether House Republicans can be persuaded to go along with getting rid of ethanol and other tax subsidies to cut the deficit. Their position has generally been that such subsidies should be eliminated in a revenue neutral way that cuts overall tax rates.

House Majority Leader Eric Cantor (R-Va.) reiterated after Thursday’s meeting that raising taxes remains off the table. House Republican Conference Chairman Jeb Hensarling (Texas) said he would want any savings from getting rid of tax subsidies to go toward cutting tax rates.

And Van Hollen pushed back against reports that Democrats might be willing to support big cuts to Medicaid benefits.

“Democrats are going to make sure that we protect seniors in nursing homes and disabled individuals and kids who need health care,” he said. Democrats have offered, however, to cut costs in the program by slashing payments to drug companies by $80 billion.

Anna Palmer contributed to this report.