S&P downgrades could put pressure on 'supercommittee'

President Barack Obama is urging the special congressional committee on deficit reduction to think big in the wake of Standard & Poor's downgrading of U.S. debt last week. “My hope is that Friday's news will give us a new sense of urgency,” Mr. Obama said in remarks at the White House this afternoon. He indicated that he wants the bicameral panel, which will be comprised of six Republicans and six Democrats, to tackle tax reform to ensure that everyone pays a “fair share” of paring the deficit. He also said he would like to see “modest adjustments” to entitlement programs like Medicare. Such an agenda would be ambitious for the so-called supercommittee, which was created by the recent debt ceiling legislation. It is charged with finding at least $1.2 trillion in deficit reductions over the next 10 years to add to the $917 billion over 10 years that were included in the debt ceiling measure. The committee has until Nov. 23 to present a package to Congress that would have to be approved by majority votes in the House and Senate. No amendments would be allowed. If Congress fails to pass the bill, across-the-board cuts of $1.2 trillion would be imposed on domestic and defense programs. In cobbling together the debt ceiling bill, Republicans refused to consider tax increases while Democrats were resolute in protecting Medicare and Social Security. Mr. Obama called on both parties to use “common sense” and be open to compromise. He said that major deficit reduction was being held back by partisanship. “It's a lack of political will,” said Mr. Obama, who will be submitting his own recommendations to the committee. “It's drawing lines in the sand.” Observers expect those lines to remain in place unless lawmakers get heat from voters during the August congressional recess. If the S&P downgrade results in the stock market's collapsing precipitously — jeopardizing 401(k) plans, causing car- and home-loan rates to spike or forcing cutbacks in municipal services, politicians will get an earful, according to Andrew Friedman, principal at the Washington Update. “Congress starts acting when the effects of the downgrade get to Main Street,” said Mr. Friedman, who has been warning about a downgrade since February. “If the markets rebound and interest rates stay low, Congress is not going to have the pressure from constituents to get something done.” John Stanton, senior legislative partner at Hogan Lovells U.S. LLP, said that the time legislators spend in their home states and districts will be the “single most determinative factor” in how much each side of the select committee is willing to compromise. “That could help them overcome their campaign talking points and the ‘you first' hurdle,” Mr. Stanton said. But it may take more than the downgrade to get Washington to move beyond partisan positions. “I don't see it having much of an impact on the select committee, nor do I see it affecting the select committee membership,” Sam Olchyk, a partner at Venable LLP, wrote in an e-mail. “Each party will select members that will adhere to its principles, making the select committee's task very difficult.” Like Mr. Olchyk, Dean Zerbe is a former tax counsel on the Senate Finance Committee. He shares the view that the political lines are not likely to be erased. Republican leaders “will not appoint any members who are going to look toward raising taxes,” said Mr. Zerbe, who is managing principal at alliantgroup. But the downgrade could spur the committee to raise the bar on the total amount of deficit reduction. “Maybe they could swing for the fences, which would be $1.5 or $1.6 trillion,” Mr. Zerbe said. S&P has said that it doesn't see a further downgrade occurring unless Congress fails to follow through on spending cuts. The agency, however, couldn't have been impressed with the political finger-pointing that ensued immediately after the downgrade, especially because gridlock was one factor contributing to the lower rating. “The initial reaction was to keep blaming the other guy,” Mr. Friedman said.