Democrats are split on whether the supercommittee needs a failsafe plan

Democratic policy experts are divided over whether a failsafe deficit-reduction plan is necessary to avoid a market panic if the congressional supercommittee fails to reach a deal.

The split reflects differences within the party over whether it’s imperative, in the first place, for the supercommittee to find at least $1.2 trillion in cuts by Nov. 23.

Third Way, a Democratic think tank, has given the supercommittee a $1.65 trillion “break-the-glass” plan to serve as a fallback if its members cannot reach a broader agreement to curb the deficit.

“There’s probably agreement among the entirety of supercommittee that not getting to $1.2 trillion would be a real problem,” said Jim Kessler, senior vice president for policy at Third Way who served as a longtime aide to Democratic Senate leader Chuck Schumer (N.Y.).

The fallback option would raise tax revenues by $434 billion, cut mandatory spending by $549 billion and defense programs by $420 billion, achieving $253 billion in interest savings.

The total savings, $1.65 trillion, would be enough to pay for $450 billion in stimulus legislation, a top priority for Democrats in the negotiations.

Kessler and David Kendall, Third Way’s senior fellow for health and fiscal policy, describe in a memo the potential fallout if the panel cannot reach agreement.

They predict Moody’s and Fitch Ratings would downgrade the nation’s credit rating, causing the stock market to tumble and dealing a blow to future deficit-reduction efforts.

Supercommittee failure would undermine the credibility and political clout leaders need to sell their constituencies on continued deficit reduction, they argue.

But Chad Stone, chief economist for Center for Budget and Policy Priorities, a more liberal-leaning think tank, downplayed the likelihood of economic and political repercussions.

“The idea that the financial markets will go into terrible panic if the committee doesn’t come up with a plan… doesn’t strike us as that credible,”  Stone said.

Stone argues that automatic cuts, known as sequestration, would take place if the supercommittee deadlocks.

He said the greater risk is the committee cuts too much, dampening already weak economic demand.

“The Congressional Budget Office and the Federal Reserve are saying you can attend to the short-run problems in the economy first. It’s good to put out a longer term deficit reduction strategy but it doesn’t need to be immediate,” he said.

Business groups and Wall Street analysts lean toward the view of Third Way.

A large coalition of business groups led by the U.S. Chamber of Commerce sent a letter to the supercommittee Friday pressing its members on the economic implications of their work.

“We believe it is crucial to act expeditiously to rein in spending, reform the tax code, reduce the deficit, and stabilize and ultimately lower America’s level of debt,” the groups wrote.

“We believe it is crucial for the supercommittee to succeed in crafting and advancing a credible multi-year plan to stabilize and reduce debt, which would have a positive effect on the economy,” they added.

Wall Street analysts have also warned of the perils of gridlock.

Merrill Lynch issued a memo this week predicting that Moody’s or Fitch could follow Standard & Poor’s decision in August to downgrade the nation’s credit rating from AAA.

Standard & Poor’s downgrade triggered a major stock sell-off that sent the Dow Jones Industrial Average down more than 600 points.

Negotiations appeared to hit a wall this week when Republicans rejected a Democratic plan to cut the deficit by $3 trillion over 10 years through a combination of spending cuts and $1.3 trillion in tax increases.

“This is the same number that was in the president’s budget, the same number that I don’t know if they found any Democrats in the House and Senate to vote for,” House Speaker John Boehner (R-Ohio) told reporters. “And so, I don’t think it’s a reasonable number.”

Liberals don’t like the Democratic offer, either.

The Center for Budget and Policy Priorities said Friday it “marks a dramatic departure from traditional Democratic positions — and actually stands well to the right of plans by the co-chairs of the bipartisan Bowles-Simpson commission and the Senate’s ‘Gang of Six.’”

House Democratic Leader Nancy Pelosi (D-Calif.) urged the panel to “narrow its possibilities and reach an agreement,” a statement stressing the importance of reaching a deal to cut at least $1.2 trillion.

Kessler says Third Way’s failsafe plan offers a middle ground compromise that would spare the nation from the economic turbulence that shook markets this summer.

“We thought, let’s put together a plan with both sides inching over the lines in the sand but not materially breaking the pledges they’ve made to their respective bases,” Kessler said.

It would raise taxes by closing select tax breaks but not increase tax rates, a non-starter for Republicans.

Several of the tax proposals are taken from conservative Sen. Tom Coburn’s (R-Okla.) “Back in Black” plan, such as eliminating the tax deduction for mortgage interest on second homes.

The plan would reduce Social Security costs by calculating cost-of-living adjustments on the basis of a chained consumer price index. This would reduce cost-of-living increases by a third of a percentage point.

Democrats have steadfastly resisted cuts to Social Security benefits but have expressed willingness to consider the switch to chained CPI.

“This doesn’t poke any of the constituencies or parties in the eye,” said Kessler. “If they can get a grand bargain, we salute them. If they can’t, here’s a way to get to the target and make it easier to get to a deficit-reduction deal when the Bush tax cuts expire in a year.”