Downgrade turns up heat on Congress

NEW YORK (CNNMoney) -- The downgrade of the United States' AAA credit rating will apply even greater pressure on Congress to follow through on plans to tame the nation's debt. Over the next few months, Washington is set to engage in a series of battles over the fiscal course of the federal government. Print And that debate will largely be carried out through a new bipartisan "super committee." The 12-member panel -- six Democrats and six Republicans -- will have until Nov. 23 to propose how to cut between $1.2 trillion and $1.5 trillion in deficits. Congress will then take an up-or-down vote on the proposals by Dec.

23. In its downgrade announcement on Friday, credit rating agency S&P said it could "stabilize" the country's rating if the committee's work helps lead to debt-reduction measures "beyond the minimum mandated." The committee was established by the debt ceiling deal signed by President Obama this week. The law put caps in place on domestic and defense spending, resulting in cuts of $917 billion over 10 years. According to the Budget Control Act of 2011, Congress must appoint members to the committee in the next couple weeks. What's wrong with the debt ceiling deal Members will be tasked with finding ways to cut the deficit while navigating tough issues that have festered in Washington for decades: taxes, along with cuts to entitlements, defense and discretionary spending. The members of the committee will face intense pressure from lobbyists and special interest groups, as well as their fellow lawmakers -- who have to run reelection campaigns and want their views represented. A dispute has, of course, already erupted over whether the committee will tackle taxes, and which baseline should be used to measure cuts. While the committee -- once appointed -- faces a series of tough choices, they also have a powerful incentive to finish their work on time, and on budget. 0:00 / 1:48 Who is getting squeezed by the debt deal? The committee's goal is to cut at least $1.5 trillion in debt. If it fails to do that or deadlocks, the sword of Damocles will fall on most forms of spending in the federal budget. Specifically, as much as $1.2 trillion in across-the-board cuts would kick in -- evenly divided between defense and non-defense spending. The battle over 2012: The super committee won't be the only budget game in town. Lawmakers will also have to decide on agency spending levels for fiscal year 2012, which starts Oct. 1. As part of the debt ceiling deal, Congress decided to cut spending for the year, but not which programs and agencies will receive less money. The deadline for making those tough choices is just around the corner. The debt ceiling law sets discretionary spending levels for 2012 at $1.043 trillion and at $1.047 trillion for 2013 -- or an accrued total of $10 billion below current levels. Congress has made little progress on the normal appropriations process, and faces the risk of starting the year with a short-term stopgap spending plan, called a continuing resolution. That sounds an awful lot like what happened with the fiscal 2011 budget, when the process degenerated into a protracted battle that brought the government to the edge of a shutdown. Congress passed seven continuing resolutions over the course of six months. Of course, short-term spending bills are nothing new. Congress has enacted at least one every year for all but three of the past 30. But seven in one year was unprecedented, and indicative of partisan gridlock. It now appears lawmakers will face the same kind of battle over 2012 funding, at the same time the super committee will be doing its work and presenting its findings. 

European fear: The wolves are at the gate

Sarkozy, Obama, Merkel and Cameron stand together. NEW YORK (CNNMoney) -- A sharp drop in manufacturing, a towering debt-to-GDP ratio and a jaw-dropping decline in equity markets. No -- not the United States. Europe! Print Many of the underlying tremors that led to this week's steep sell-off in the U.S.

have been festering in plain sight in Europe for a year or more. Consider a few figures: European indexes have been hammered over the past month, with the main exchanges of England ( UKX ) off 12.9%, France ( CAC40 ) 17.6% and Germany ( DAX ) 16.7%. The economies of Italy and France -- two of the continent's largest -- expanded by only 0.3% and 0.2% in the second quarter. The problem? Developed countries piled on massive amounts of debt during the recession. Advanced economies worldwide increased their debt burden from $18.1 trillion in 2007 to $29.5 trillion in 2011, according to researchers at the Brookings Institution. And that's not the half of it. The number is projected to grow to $41.3 trillion by 2016. Throw 3 coins in the fountain. Italy needs them The bill collector has already come for some. Billions have been spent propping up Ireland and Greece, and investors have not been shy about sending yields through the roof when they smell blood in the water. Investors lending money to Spain are now demanding interest rates of 6%, while Greek bonds carry a 15% rate and yields on Italian notes spiked this week to 5.5%. Coupled with weak growth, the sharp increase in interest rates only adds to the countries' debt and makes it even more difficult for them to lower their debt-GDP-ratio. There is some evidence that politicians are waking up to the scale of the crisis. What's going on with Italy? German Chancellor Angela Merkel and French President Nicolas Sarkozy planned to interrupt their summer vacations -- a hiking holiday in Italy and a three-week excursion to the French Riviera -- to confer by phone about the growing economic unease. That's welcome news, because while the crisis started at the continent's periphery, it has now arrived at the gates of Italy and Spain. And that, according to Domenico Lombardi, a senior fellow at Brookings and former International Monetary Fund executive board member, should worry policymakers in the United States. "Italy has been hit," Lombardi said. "It's the third largest economy in the euro area, and there is no organization that can bail Italy out. It's just too big to swallow." 0:00 / 5:15 Market correction looks bearish If the situation in Italy were to worsen, the impact could lead to weakening demand for U.S. exports, uncertainty in global currency markets, and consequences for U.S. banks that are exposed to the European banking system. The timing couldn't be worse for the United States, which is about to engage in some fiscal belt-tightening as a result of the debt ceiling deal negotiated in Washington. With the government pumping less money into the economy, policymakers need to find a way to increase demand for U.S. exports, Lombardi said. "But this is certainly not going to come from Europe," he said. The tremendous instability in Europe is yet another drag on an already weak U.S. economy and could increase uncertainly, spark a rush to safe-haven assets or delay major investments by American businesses. "The economic recovery in the U.S. is inherently fragile," Lombardi said. "And this could have a dramatic effect on the job market outlook." On Friday, EU Economic and Monetary Affairs Commissioner Olli Rehn tried to calm the swirl of rumors as markets bucked up and down. "The market unrest witnessed in the last few days is simply not justified on the grounds of economic fundamentals," he said, having broken off his holidays to return to Brussels. "It is not justified for Italy. It is not justified for Spain." But try telling that to bond markets. 

FCC promises 100,000 jobs

WASHINGTON (CNN) -- When you call customer service in the time ahead, chances should improve that you will reach someone in the United States, with a forecast of 100,000 new jobs at call centers to be created the next two years, according to the Federal Communications Commission. In an announcement expected Thursday at a call center in Jeffersonville, Indiana, FCC Chairman Julius Genachowski will detail how small towns are replacing jobs lost from declining industry with new jobs made possible by broadband technology. Print Call centers need broadband capability to handle Internet-based chat sessions with consumers along with traditional phone calls and email correspondence. But many call centers have moved outside the United States where labor is cheaper. Where the Jobs Are Thursday's announcement, partnered with a business group Jobs4America, promises to return some of those jobs to America.

Genachowski, according to his staff, will be at a call center that services the Charbroil outdoor cooking chain and the discount retailer BJ's Warehouse ( BJ , Fortune 500). The center's activities have been based in India, the FCC said. The move is creating 175 jobs in the United States. 0:00 / 4:40 Job cuts by the thousands Jobs4America, in a statement, said the jobs will include "marketing and sales communication with consumers, as well as chat, social media monitoring, and web and phone-based self-service options," such as obtaining information about product recalls and the status of discount rebates for which consumers have applied. The contact center industry, as the group describes the field, can create thousands of U.S.-based jobs to help cut unemployment. A tally of jobs from members of Jobs4America includes: Aegis Global -- 4000 jobs Alpine Access -- 4000 jobs Accent -- 2000 jobs Novo1 -- 1000 jobs Back Office Support Systems -- 1000 jobs Sprint -- 600 jobs Etech -- 250 jobs CallAssistant -- 250 jobs AnswerNet -- 200 jobs QCSS, Inc. -- 200 jobs 

Aviation workers deal with politics-induced furloughs

FAA engineer Michael MacDonald, in the red shirt on the left, has been furloughed for a week. WASHINGTON (CNNMoney) -- Some 4,000 furloughed aviation workers are the latest casualty of political infighting in Washington. Families used to making $75,000 a year are filing for unemployment benefits and worrying how to make mortgage, car and student loan payments, furloughed workers say. Print "It really is scary," said Michael MacDonald, a 54-year-old Federal Aviation Administration engineer who lives outside of Boston. "For one week, you think OK, we can handle one week.

But now the reality is starting to set in --- this is going to take six weeks or more." The FAA has been partially shut down for more than a week, with only air traffic controllers, mechanics and those integral to keeping planes flying safely on the job. The plight of 4,000 FAA workers has been overshadowed by greater commotion over raising the debt limit and spending cuts. But lawmakers have also been at odds over approving a routine stop-gap funding measure for the agency. With the House adjourned, the funding impasse will likely grind on for FAA employees who are feeling the pinch of a lack of paycheck, not to mention perks such as like 401(k) retirement benefit contributions. MacDonald works on updating communications systems for the FAA. He's worried about paying his mortgage, car loans and college tuition for his two kids. He filed for unemployment benefits last week and has been urging his colleagues to do the same. "I've never been in this situation before," said MacDonald, a 20-year veteran of the FAA. While many employees, especially single parents, are terrified of spiraling into debt, other FAA workers say they're just furious that they've become the victims of partisan wrangling in Washington. "For this to be about something so petty, it's ridiculous. And terribly arrogant and totally uncaring," said Steve Alexander, 59, who lives near Sanford, N.C. Alexander's last day on the job was July 22, when he finished upgrading the landing system at Memphis International Airport. Best Travel Deals While Alexander saved up over a year to withstand this furlough, as a union representative, he has been talking to panicked colleagues who can't afford to be out of work for weeks on end. The partial shutdown impacts more than just federal workers. The FAA had to stop hundreds of airport construction projects nationwide, which means some 24,000 construction workers are also out of work. Another 35,000 support workers, such as food service vendors, are also impacted, said Steve Sandherr CEO of the Associated General Contractors of America. 0:00 / 2:11 Bring air traffic into 21st century "This can't go on a day longer, much less six weeks longer," Randy Babbitt, administrator of the Federal Aviation Administration, told CNN on Tuesday -- CNN's Mike M. Ahlers contributed to this report.  

What ever happened to tax reform?

President Obama and Speaker Boehner tried to strike a "Grand Bargain" that included tax reform, but talks fell apart. NEW YORK (CNNMoney) -- Legislators finally approved an eleventh-hour plan to raise the debt ceiling on Tuesday, but one part of the debate was left out of the final draft -- tax reform. Deficit reduction of up to $2.4 trillion was the centerpiece of the deal to raise the nation's borrowing limit, which passed Congress this week after months of debate. But the deal accomplishes that only through spending cuts, not an increase in tax revenue, as Democrats had pushed for. Print According to a CNNMoney survey, most economists wanted some kind of tax reform to be included in the deal -- fewer deductions and loopholes for both individuals and businesses which would allow for lower rates but increase collected revenues.

"Tax policy is absurd on its face, keeping accountants and lawyers and especially lobbyists in gravy," said Gary Rosenberger of research firm EconoPlay. "What people forget is that if oil companies and hedge fund managers continue to get the breaks that nobody else gets, it ultimately forces property taxes to rise for everyone," he said. The economists surveyed widely agreed that current tax code is a drag on economic growth, because it gives advantages to certain portions of the economy, rather than letting market forces determine winners and losers. And eliminating or limiting deductions and credits and would also allow for a lower tax rate which could boost business activity. "A flatter tax system with fewer special tax incentives or subsidies for various interests and a lower overall rate structure would enhance economic efficiency and potentially growth," said Lynn Reaser, economics professor at Point Loma Nazarene University. Most conservatives in Congress agree that lowering tax rates could spur economic growth. And the idea is also popular among Democrats, because it would eliminate the loopholes that allow some companies to pay effective tax rates near zero. Tax reform was a large part of a plan unveiled last year by the President's bi-partisan debt reduction commission headed by Erskin Bowles and Alan Simpson. Fed Chairman Ben Bernanke has also spoken in favor of tax reform in general terms. And it was discussed by President Obama and Speaker John Boehner last month as part of a so-called "Grand Bargain" that would have also made changes in entitlement spending such as Social Security and Medicare. When those talks fell apart, President Obama continued to push for some limited changes in the tax code to eliminate some breaks, such as those for corporate jet owners, oil companies and hedge fund managers. In the end, Republicans refused to support any increase in tax revenue or change in the tax system as part of the debt reduction plan. 0:00 / 3:20 'Obama folded like a lawn chair' But economists doubt that spending cuts alone can produce the savings needed to trim long-term deficits. "I don't think there can be enough cuts in the major programs to give the cuts in the deficit we need on the coming years," said David Wyss of Brown University. According to the survey, economists believe the ongoing debt ceiling debate was a drag on economic growth. About a third of those surveyed said they were worried about the economy falling into a double-dip recession without an increase in the government's authority to borrow. 

Inflation (CPI)

Gas prices fell sharply in June. NEW YORK (CNNMoney) -- Falling prices at the pump pushed inflation lower in June, but consumers are still paying significantly more than they were last summer. The Consumer Price Index, the government's key inflation measure, fell 0.2% in the month, led by a 6.8% drop in gasoline prices over the same period. It was the first time in a year the monthly CPI reading decreased. Print Economists surveyed by Briefing.com were expecting the rate to fall by 0.1% in June.

"The decline in overall inflation is a positive for consumer spending," said Joseph LaVorgna, chief U.S. economist for Deutsche Bank. "In general, lower gasoline prices are hugely stimulative to households - every one cent decline in gasoline prices frees up $1 billion in aggregate cash flow." Recovery at risk But consumers were still paying 3.6% more for goods and services than in June 2010. Gas prices are a major factor there as well. Even with two months of declining prices at the pump, gas costs consumers 36% more than it did a year ago. Economists are worried that lower gas prices are masking signs of growing price pressures elsewhere in the economy. Prices for such staples as food, clothing and cars continue to climb. "All in all, there is increasing evidence that price pressures are building across a broad range of goods and services," said Peter Newland, economist with Barclays Capital. 0:00 / 2:21 Fewer cars, higher prices So-called core CPI, which strips out volatile food and energy prices, rose 1.6% over the last 12 months, and 0.3% in June. Economists had expected only a 0.2% increase in the monthly rate. The Federal Reserve's comfort zone is for a core inflation rate of between 1% and 2% a year. While the Fed has raised its forecasts for overall inflation through 2012, it still expects core inflation to remain in check, making interest rate hikes less likely this year. 

Boehner vs. Reid bills: Where they meet

Something's gotta give to get the debt ceiling raised in time. And there is some common ground between the proposals Senate Majority Leader Harry Reid and House Speaker John Boehner. NEW YORK (CNNMoney) -- There certainly are some big differences between the debt-ceiling bill proposed by House Speaker John Boehner and the one proposed by Senate Majority Leader Harry Reid. But there is also more than $900 billion's worth of compromise between the two. Print Both bills call for caps on discretionary spending -- that's the money Washington uses to pay for defense and all manner of government agencies and programs.

Excluding spending on the wars in Iraq and Afghanistan, the Boehner bill would reduce overall spending by $917 billion over 10 years, according to Congressional Budget Office estimates. Similarly, Reid's bill would cut spending by $927 billion. Breaking those estimates down further, Boehner's bill would cut discretionary spending by $756 billion and save $156 billion in interest costs on the debt. The comparable numbers for Reid's bill are $752 billion and $153 billion. Both bills also ignore the hot-potato issues of tax and entitlement reform. So why can't these two bills get along? There are some major sticking points. Boehner's plan: The House bill would call for a two-stage increase in the debt ceiling. The first would be worth $900 billion, which might cover the Treasury Department's borrowing needs into early 2012. But the House bill would set two high hurdles that would have to be cleared before increasing the debt ceiling by another $1.6 trillion -- which could cover borrowing needs past the presidential elections into 2013. Spending cuts to whack economy? First, Congress would have to approve $1.8 trillion worth of debt-reduction proposals by the end of this year. Those proposals would be made by a joint committee the bill would create and no amendments would be permitted. In addition, to secure the second debt ceiling increase Congress would have to enact a balanced budget amendment by a two-thirds vote in the House and Senate, which is very difficult to secure. Overall, Boehner's bill would increase the debt ceiling by a total of $2.5 trillion in exchange for $2.7 trillion in debt reduction. Reid's plan: By contrast, Reid's bill as amended would set a procedure to raise the debt ceiling by $416 right away and two more times after that for a total debt ceiling increase of $2.4 trillion, in exchange for $2.2 trillion in debt reduction. Reid's cuts count roughly $1.3 trillion in war savings in Iraq and Afghanistan, including debt service costs. But those savings can only be claimed if one assumes that U.S. engagement in Iraq and Afghanistan will continue at full throttle for the next decade, which is not realistic. Like Boehner's bill, Reid's legislation would create a joint committee but it would be charged with proposing ways to reduce annual deficits to 3% or less of gross domestic product. And while the Senate would have to vote on those proposals without amendment, there is no requirement the proposals be enacted. 0:00 / 3:21 Debt ceiling made easy The House approved the Boehner bill on Friday evening in a 218-210 vote; 22 Republicans voted against it and no Democrats voted for it. But the Senate then promptly voted to table it. That was expected, since 53 senators on Thursday said that if presented with the Boehner bill they would vote against it. It's also not at all clear that Reid's plan will pass the Senate, which is scheduled to vote on it at 1 am Sunday. Presuming both measures fail to generate sufficient support in one or both chambers, lawmakers will have to get serious about striking a real compromise between the parties and the two chambers. At the rate they're going they may have mere hours to do so before the government's borrowing authority is fully exhausted on Tuesday. - CNN's Lisa Desjardins and Kate Bolduan contributed to this report.