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Debt Ceiling Debate; Boehner's Plan; Default Deadline

Aired July 27, 2011 - 19:00   ET


JOHN KING, HOST: Thanks Wolf and good evening everyone.

Washington is broken at the moment and you are beginning to pay a higher and a more painful price. The markets were down today, meaning your 401(k) is worth less tonight. And with just five days to go until the government says it would have no choice but to default on some big bills, the CEO of Wal-Mart told Congress today the squabbling here in Washington could have a huge negative impact nationwide on an already fragile recovery.


MIKE DUKE, WALMART CEO: A default and the ripple effect I think would be impactful and representing our consumers, we think that that would be very, very difficult for the American economy to withstand at this point in time in our history.


KING: That's here at home. Then there are global worries. Concerns that a default or even a close call here could rattle international markets and international economies like that domino effect back after the big Wall Street meltdown a few years ago.


CHRISTINE LAGARDE, IMF MANAGING DIRECTOR: The United States is the largest economy in the world, one that matters, one that has spillover effects not just around the borders, but on a complete basis, globally.


KING: So, the stakes, well they're obvious. The path to a solution, however, not nearly as clear.


SEN. HARRY REID (D-NV), MAJORITY LEADER: Is it today? Is it tomorrow? Is it Friday? Magic things can happen here in Congress in a very short period of time under the right circumstances.


KING: Now, by "right circumstances" we assume Leader Reid means conversations and compromise, not some magical "Harry Potter" moment, but while there's plenty of talk, there aren't many conversations and there's little evidence of compromise tonight. As we speak House Republicans and Senate Democrats are crafting competing plans and President Obama, well, he's largely at the moment pushed to the sidelines, his campaign operation, though, now using its phone and its e-mail list to text supporters urging them to pressure Congress. The guy that very same phone and e-mail list helped beat nearly three years ago doesn't find that funny or particularly helpful.


SEN. JOHN MCCAIN (R), ARIZONA: It's unfair of the president of the United States to lead from behind. It's unfair of the president of the United States not to come forward with a specific plan.


KING: Our congressional correspondent Kate Bolduan is where the action is found tonight. That's up on Capitol Hill. Kate, I guess the first question is, when Speaker Boehner met with his troops this morning, he had to use some pretty choice language. Has he made enough changes to his plan to get those Tea Party members back in line?

KATE BOLDUAN, CNN CONGRESSIONAL CORRESPONDENT: You never know the votes until we see them done, but I'LL tell you, things are looking better than they did yesterday. A top Republican leadership aide said this evening that things are moving in the right direction in terms of votes and that they're feeling confident, adding to that confidence this evening of course is the new cost estimate numbers for this rewritten bill just out late this evening.

House Speaker John Boehner, he's not quite at his target that he originally set but he is meeting his principles. The CBO, the Congressional Budget Office, John, says that his new, rewritten plan reduces the deficits by $917 billion, which is greater than what he is planning to raise -- calling for raising the debt ceiling by, which is $900 billion. The important point there is that it meets the principle that he set out early, the test that he had, that the cuts had to be greater than the amount they were going to increase the debt ceiling. That is adding to their confidence this evening as they head into what's expected to be the vote tomorrow -- John.

KING: Expected tomorrow -- Kate, stand by. I just want to show our viewers a little bit more detail what you're talking about up there, compare some of the Boehner and the Reid proposals side by side. Essentially what Speaker Boehner wants to do is give the president a trillion dollar increase now and the right to get a $1.6 trillion increase, a second installment, if you would, before the 2012 election.

Leader Reid said let's do it all at once. Let's have one big bill that gives the president 2.4 trillion. That's the basic outlines here and as Kate just noted, the Congressional Budget Office tonight, Speaker Boehner originally said he wanted to shoot for about 1.2 trillion in cuts. The Congressional Budget Office says his new revised plan gets him almost there, but not quite, 917 billion. Again, the Reid plan, which is one big approach, he wanted about 2.7 trillion in cuts. The Congressional Budget Office says well you have about 2.2 trillion in there. One more key point and then I want to go back out to Kate; both of these plans would propose deficit reduction commissions made up of members of Congress. The speaker says for the president to get that second installment you'd have to find about $1.6 trillion in cuts.

Leader Reid has not had that amount -- he has not made that clear. He says let's have a commission. Let's have more cuts, come up to the Congress. Kate, from the Reid side there is this letter tonight signed by the Senate Democrats, almost all of them, saying, Mr. Speaker, we won't pass your plan in the Senate. The question tonight is, is this politics and posturing? If Speaker Boehner can get the votes, does that change the psychology, the momentum on Capitol Hill?

BOLDUAN: I think what changes the psychology the most is the timing. I think everyone agrees that if this really became the eleventh hour, if you don't think we're at the eleventh hour already, it really kind of all bets are off and things will change. But at the moment the Senate majority leader, Harry Reid, he was very firm today. I asked him a couple times that it would not pass the Senate, it would not pass the Senate, it would not pass the Senate he kept saying.

So he does not think -- he is pretty sure that the votes aren't there in the Senate, and so what will we end up with, John? You and I and we've all kept saying it will end up looking like some kind of compromise, but what it's really going to actually look like is not clear this evening.

KING: That's because it's only Wednesday and the deadline is a few days away.


KING: Kate Bolduan for us -- great reporting on Capitol Hill. Thanks, Kate.

And for better or worse and most likely you'd argue worse, there's nothing like a deadline to get Washington focused as we just noted, so is the calendar enough to force a compromise or is default a real possibility? David Gergen and Gloria Borger with us tonight. David, I want to go to you first because we have -- there's a leadership question here on several fronts.

Speaker Boehner, Leader Reid, the president of the United States -- I want to start with the speaker, who went before his caucus this morning and forgive me at home for using this language. He essentially said I know my plan fell a little short, I'm going to make it better, but when I do, you have to support me -- his language -- again, excuse me at home -- you have to get your asses in line. Speaker essentially saying if they don't back him, it will undermine Republican leverage in the negotiations and they will undermine his stature as a leader. Are we seeing an impatient speaker or is that just an old football coach use some tough language to rally the troops?

DAVID GERGEN, CNN SENIOR POLITICAL ANALYST: I think as a leader who knows his job is on the line and that if he doesn't get this, he's got a runaway caucus and the Republicans lose stature. If they were -- if the Boehner plan were to fail in the House, the advantage moves to Senator Reid and to the president. If Boehner wants to have strength in the final negotiation, he needs to get this through the House. And so I think it was critically important. Yesterday he had a bad day.

Today he had a much better day. I think Gloria's been reporting on this, but I believe from what she's been saying and what I've been hearing, there's a good chance now that Boehner will succeed in the House and then it shifts attention to the Senate because Reid's plan probably can't pass the Senate and what Reid might do, then, is take elements of Boehner and try to introduce what, then, could be the compromise and see if he can get McConnell to somehow bless it and work out the architecture of it.

KING: So a good old-fashioned compromise and the question is --


KING: -- everybody -- everybody lays down their language -- emphasis on maybe. I want you to listen -- Dan Pfeiffer was here -- Jessica Yellin was filling in for me last night, and Dan Pfeiffer was here. And they were essentially -- there's a lot of this in politics. The White House saying forget it Mr. Speaker. We don't care about your plan, the president would veto it. Let's listen to Dan Pfeiffer.


DAN PFEIFFER, WHITE HOUSE COMMUNICATIONS DIRECTOR: The fate of the Boehner bill is largely irrelevant because it can't pass the Senate. It's not -- the president is not going to sign it, and so we're basically wasting critical days and a -- with a ticking clock on what's essentially at best a political statement.


KING: I think that is probably --


KING: That probably is at best a political statement in the sense that if a plan gets to this president's desk that increases the debt ceiling and averts default and is anywhere close to anything he's outlined, "A," as president of the country and, "B," as a candidate for re-election --


KING: -- he's going to sign it, right?

BORGER: Yes, he's going to have to do it. You know the big problem is they want to avoid another vote. They just don't want to go through this again six months down the line. And I was talking to a senior Democratic aide today who outlined for me four completely different scenarios under which actually Reid's bill, which is different from Boehner's bill, but not that different, could overtake Boehner, could be attached to Boehner's bill, and they're trying to figure out a way that they can get out of it. I think all eyes now are on the Senate Republican leader, Mitch McConnell. As you know, John, he's pretty good with this kind of maneuvering, and one Senate Democrat said to me today we need McConnell to step up and give the big-boy talk to Republicans.

KING: He'll wait for the right moment I think and give that talk.

BORGER: And he will.

KING: David, I was out of town for a couple of days, and I was at an event. There were people from all over the country there. It was my oldest son's college orientation, but there were people from all over the country there and they're asking me questions. What's going on in the daycare center, meaning Washington, D.C.? Some of them were Tea Party supporters. Some of them were Democrats. A lot of them were people in the middle. One of the questions a lot of them asked is why does Washington look the same or worse -- where -- and I want to show our viewers a little bit of a sample here -- where did this guy go?


BARACK OBAMA (D-IL), PRESIDENT OF THE UNITED STATES: I believe that the size of our challenges had outstripped the capacity of a broken and divided politics assault. You can reach across the aisle. You can disagree without being disagreeable. We have a chance to bring the country together. We are tired of business as usual in Washington. We are hungry for change, and we are ready to believe again!


KING: I am by no means -- I want to make it clear no means -- blaming just the president for this environment. Everybody's to blame in this environment, but, David, as someone who promised to try so hard to make it so different, when you're heading into a re-election cycle and you're having this problem, Americans are looking at Washington and saying, come on, not again, and you have 9.2 percent unemployment. The president has to be worried about this.

GERGEN: Oh, worried? I just think he must be just heartsick. He could be the first president in American history to preside over a downgrade of our AAA credit rating. That's a growing probability I think, John. And the kind of concern, disgust that you ran into at your gathering I think is widespread across the country. And I agree with you.

There is shared responsibility and shared blame for this. Yes, there has been a lot of Republican intransigence. The Democrats have not yet produced a budget. They don't pass budgets. The president hasn't produced a plan. But this could be a case study, as you well know in colleges, for years to come of how not to lead.

KING: And how not to lead, how not to act, and, again, the president has principles he's standing on. Some of these new Tea Party men and women, Gloria, they say look we just won an election months ago. This is what we promised to do. Now you are telling us we have to break our promise.

BORGER: Right. But compromise is not a dirty word when the government and -- is standing on the brink here, and I think that's why John Boehner was so tough with them. Because not only is his leadership on the line, but I think the Republican Party is on the line. You know, Republicans won the House, not because people loved Republicans. It's because they wanted to give them a shot at governing, and if they prove that they can't govern, cut some kind of a deal, they're going to pay at the polls and it could be a large anti-incumbent year for both parties but really hurt the Republicans.

KING: Very interesting --

GERGEN: Yes, John --

KING: Go ahead --

GERGEN: John, I have to say I sense that Gloria and I are not in the same place, and that is the odds still slightly favor some kind of agreement at the end that prevents default, whether it's in the next few days or longer. But that the odds now have gone up a lot, that we -- but that we will have a downgrade of our credit rating, and that really is damaging, and the 200-point drop in the Dow Jones today, you know this is just a foretaste, people's 401(k)s suffering, as you pointed out earlier, a foretaste of what's coming, and we've suffered enormous embarrassment already. This has been a very big setback for the United States.

BORGER: And a lost opportunity, an honestly --


BORGER: -- lost opportunity to do something big on deficit reduction, which is the way it looked at the beginning of this, that they might be able to do, but no more.

KING: Sometimes from the ashes and the crumbles and everything else in the debris comes progress. We'll see how the next 48, 72 hours go.

GERGEN: Hope so -- hope so --

KING: I'm just trying to be -- I'm trying to add a little hope to the town. The town needs a little hope --

GERGEN: Yes, absolutely, absolutely.

KING: We'll see how this one goes. David Gergen, Gloria Borger, we'll stay on top of this one. And still ahead here, we'll stay on this story, how did those new House Republicans react when Speaker Boehner told them this morning you need to get your you know what in line, we're going to take you inside that emotional Republican meeting.

And as we've been discussing, why this isn't just a Washington argument. How the debt fight impacts your bottom line, today and into the future. That's next.


KING: You might say it's like a roller coaster picking up steam. The stock markets are falling farther and faster because of the debt ceiling crisis. The fourth straight day the Dow industrials closed down today. Today's drop nearly 200 points, the steepest drop in nearly two months. Not only are people's retirement accounts taking a hit, there's a steady drumbeat of warnings that a downgrade of the U.S. credit rating would push up everyone's interest rates, meaning your monthly bills.

For a closer look at how all of this is affecting you and could affect you we're joined by the "Newsweek" and "Daily Beast" business columnist Joanne Lipman and "Wall Street Journal" economic editor David Wessel. Joanne, let me just start. There are some people now saying the credit rating could be downgraded even if they get a deal at the end. For somebody watching at home, sitting around the dinner table right now, maybe thinking about paying the mortgage bill in a couple of days, what does that matter to them?

JOANNE LIPMAN, BUSINESS COLUMNIST, NEWSWEEK & THE DAILY BEAST: This matters to all of us. This would be an historic event; this has never happened before that the United States debt has been downgraded. What that means is that the United States is seen as a riskier borrower, which means that the United States is going to have to pay higher interest rates and what we pay, as the country pays, as an interest rate will trickle down to every single one of us consumers. So, that means mortgage rates go up. Car loan rates go up. Student loans, credit card loans, pretty much everything. Everything -- every interest rate we'll see will be increasing.

KING: Now are the credit agencies, David, are they likely to do this anyway? Are they saying they're possibly probably going to do it to try to nudge Washington to do a bigger, better deal?

DAVID WESSEL, ECONOMICS EDITOR, WALL STREET JOURNAL: Look I think the credit rating agencies are on the defensive. They really screwed up badly before the crisis. They mispriced -- they misrated subprime mortgages. The pendulum has swung the other way. One of the credit agencies, Standard & Poor, has said they're not going to be satisfied with lifting the debt ceiling. They will downgrade the United States unless the leadership comes forward with a pretty big, grand bargain deficit reduction plan. That does not look like it's coming, so I think the betting is S&P will downgrade the U.S.

KING: And so a lot of people watching at home probably think all right, now you've convinced me this might affect me, but this is largely some Washington argument where they speak in funny languages, they can't get along like grown-ups. I want you both to listen to the CEO of Walmart, was before Congress today, talking about -- he says he goes into the stores. He talks to people who work for him and his customers and he says that this is part of a growing confidence crisis.


DUKE: When I'm out talking to our consumers and with the situation in the economy with the jobs situation and other factors facing consumers, I think a default at this time would be devastating in that both reality and perception of consumers.


KING: In the American economy that perception, that confidence, Joanne, matters hugely, doesn't it?

LIPMAN: It's enormous. It's enormous. In fact, what he's talking about I think is the single most important issue in the economy and for businesses today, because the -- every business depends on consumer confidence. We need -- and the economy -- the economic recovery depends on consumer confidence because if you look at our GDP, the size of our economy, 70 percent of that is due to consumer spending. And I will tell you that when you have this dysfunction in Washington, it is trickling down to people being nervous. When you see the dysfunction in Washington, people say, well, I'm really not ready now, then, to buy a car or -- because I don't know what's going to happen.

I don't know if I want to buy that big-screen TV, and I will tell you, I spend a lot of time with CEOs and corporate executives and this is a very, very, very big concern for them, the dysfunction in Washington. I'll tell you recently I was speaking with the CEO of Sony Corporation, Howard Stringer (ph), runs a large company, we're talking, you know, video games and -- and flat-screen televisions and all the rest, electronics, and they have been -- they've been pummeled by a tsunami, they've been pummeled by cyber attacks, they've had a lot of hits this year. And so I said to him what is your biggest concern with all you've been through this year and his answer, consumer confidence.

Because, he said, our consumers are so frustrated with what's going on in Washington. And the inability of Washington to lead and to come up with a solution that they're concerned Washington is not going to fix their problems. It trickles down to all of us.

KING: A lot of other CEOs saying the same thing, and we've had this recurring conversation. They don't know what the tax environment is going to be like for the next several years. Now they see this debt ceiling playing out. We can assume that let's -- whether they get a deal through 2012 or not the debt ceiling has now become a bit of a political ping-pong ball. How much -- on the bigger economy, how much does the dysfunction of Washington if you want to call it that or the indecision of Washington affect whether some CEO out there is going to hire somebody? WESSEL: Well I think that up until now it was more of a talking point from business than reality. The CEOs I've talked to said they weren't worried about uncertainty, but the uncertainty they were worried about was, was there going to be business there, was demand going to be there. I think we've moved into a new phase and this idea that somehow we're a country where our leadership can't come together and do the basic business of government is going to make everybody hold off. And what happens in an economy like ours is if everybody hesitates, then the economy grinds to a halt. And we are at risk I think of a double-dip recession unless something comes to get those animal spirits going again and this is not that something.

KING: This is not that something. David, Joanne, appreciate your insights tonight. We'll probably call on you again as this all plays out as we watch Washington's dysfunction -- maybe grind toward compromise, maybe head toward default, appreciate your insights tonight.

Next the whole world is watching the debt fight here in Washington. We've talked about the impact right here; when we come back we'll ask Fareed Zakaria what the world thinks of us.

Also coming up a new tropical storm in the Gulf of Mexico, we're going to show you just where it's heading.


KING: So, how does this confusing and sometimes ugly debate over raising the debt ceiling and a package of spending cuts compare to past big political divides and how is it impacting the U.S. standing and reputation around the world? Let's ask CNN's Fareed Zakaria. You know, Fareed, it does remind you of the old saying never let them know how you make the sausage. What's happening in Washington right now is not pretty.

FAREED ZAKARIA, CNN'S FAREED ZAKARIA GPS: It's not pretty at all, you know, it was Bismarck who said that you don't want to be watching the insides of sausage making or legislation making. But what is odd about this one is it is a really manufactured crisis. The speaker of the House has said, you know, we could end this crisis very easily, but the whole nature of the crisis is self-inflicted. Most countries don't even have this thing called raising a debt ceiling.

KING: And on the one hand as you watch it play out, you can understand, especially the new Republicans in Washington who just ran on spending, you can understand why they would passionately say we have to deal with the spending problem. What gets hard is at what point will they do the math and realize they only control the House of Representatives.

I want you to listen to John McCain here, he's on the floor of the Senate today, the Republican presidential nominee just a few years ago saying those conservatives in both the House and the Senate who say the only way they would vote for anything here is if it included a constitutional amendment to require a balanced budget, Senator McCain essentially saying here that they're nuts. (BEGIN VIDEO CLIP)

MCCAIN: That is not fair. That is not fair to the American people. To hold out and say we won't agree to raising the debt limit until we pass a balanced budget amendment to the Constitution, it's unfair, it is bizarro.


KING: Now I'll get a lot of nasty e-mails, but you know I'm not saying I agree with Senator McCain's votes, but there he is trying to act like a grown-up.

ZAKARIA: What's extraordinary is if there was one animating idea in the Tea Party when it came to power, it was a reverence for the Constitution. You know one of the great things about the American Constitution is that we have not taken the idea of amending it lightly. We have been careful about when it was amended. We've amended it when it really needed to be amendment -- amended, issues related to slavery and women's rights to vote. We have not -- you said that every time we have a nifty policy idea, it should be amended.

You know and by the way, besides that, the truth of the matter is balancing -- having a requirement that the government balance its budget is a very bad idea. We are -- governments are not like households. In the depths of the recession, when we were losing a million and a half jobs a month, if the government had not stepped in and rescued schoolteachers and firefighters and policemen from having to lose their jobs, and if it hadn't stepped in and employed some construction workers in crucial moments, the economy would have gone into a free fall. We would have gone into a great depression.

KING: Let's move on to the view how the United States looks in the world right now. And I just want to go over so our viewers can see -- a lot of people hearing about these credit ratings and what's a AAA and a AA and a BBB and so on. You know if you're a homeowner you have a score based on a number -- up in the 800 range or something. The United States is now AAA and the Standard and Poor's and Moody's have said they could drop it somewhere here.

If you're down here at the bottom, just like if your credit rating is low, it costs more to borrow money. If you're bankrupt, it costs a lot to borrow money. It's almost impossible. If you're up here, your interest rates go up. So the question is what happens to the United States of America? And here's where it is now, AAA, and traditionally, Fareed, as you know, it has always been stable, stable, stable, one of the benchmarks of the world economy. But now watch -- negative. The rating services say because of this debate they may downgrade America's standing. Number one, what does that do to the stature, the standing of the U.S. economy and the U.S. treasury in the world?

ZAKARIA: It will raise interest rates. It will raise interest rates on everything from a car loan, on a household appliance loan to of course, mortgages, and it will raise interest rates throughout the economy, which will be effectively a tax on every American. The second thing it does is it will force the federal government to have to spend more money servicing our existing debt which means our budget deficit will go up. If the -- if interest rates go up one percent, that is what is called 100 basis points, that adds about $150 billion to the deficit, which is $1.5 trillion over the decade just to put it in terms of these 10-year programs that we've gotten. But the second point, which you raise, is markets all over the world have had what has been described as a positive bias towards U.S. treasuries. That is to say anytime there is any trouble in the world the one place they go is U.S. treasuries because they are viewed as the gold standard. That is the gold standard of safety and security.

We are losing that positive bias, and you can see it in precisely what you pointed out. We are now on, what? We're now on probation.

And as I say, this is an entirely self-inflicted wound.

KING: And when the United States economy tanked in late 2007 and into 2008, there was, of course, a global domino effect. And so, a question now, and for "GPS" this weekend, you spoke to the new head of the International Monetary Fund.

I want to listen to her take and then get your take and your take on that interview about what would happen -- what would the domino effect in global markets be if, in fact, the United States gets up to the brink and perhaps even defaults?

Let's listen to Christine Lagarde.


ZAKARIA: How worried are you right now?

CHRISTINE LAGARDE, IMF MANAGING DIRECTOR: I am worried because this debt ceiling issue has not been cracked. The issue is being addressed from multiple angles, but the debt ceiling is still on the table. And the United States is the largest economy in the world, one that matters -- one that has spillover effects, not just around the borders, but on a complete basis globally.


KING: She talked about this potential spillover effect around the world. How serious is that?

ZAKARIA: Oh, I think it would be very serious. Just look at what happened with Lehman Brothers. Look at what's happened with the Greek crisis and how it's caused all consternation and real spillover effects all over Europe.

We're talking about the gold standard of the international financial system, the bedrock. This is what has been traditionally considered to be the safest set of securities in the world upon which everything else rests.

I think you also risk something else, which Christine Lagarde talks about in the interview a little bit later, which is the dollar's role as the reserve currency of the world -- again, something that provides America with what one European once called "exorbitant privileges," mainly, again, in the form of low interest rates. We risk losing that as well.

You know, the thing I worry a lot about, John, is whether we have already put into jeopardy all these things. Every time there is now a debt ceiling renewal, it used to be automatic. People didn't think much about it. They knew there would be a little political noise around it, but the issue was a forgone conclusion.

We've now turned this into something that is an element of uncertainty.

KING: Fascinating in as always. Fareed Zakaria, thanks.

ZAKARIA: Pleasure.

KING: Coming up: a new tropical storm in the Gulf of Mexico aiming for Texas. Take a look at this. We'll bring you the details, just ahead.


KING: Welcome back. Here's the latest news you need to know right now.

Tropical storm Don formed today in the Gulf of Mexico. It's heading for the Texas coast, may be a minimal hurricane by the time it makes landfall late Friday or early Saturday.

Sarah Palin heading to Iowa over the Labor Day weekend -- among other things, she'll be the keynote speaker at a Tea Party rally in the Des Moines suburb.

By a 100-0 vote this afternoon, the Senate approved a two-year extension for the term of the FBI Director Robert Mueller.

Angels pitcher Ervin Santana did almost as well today. He no-hit the Cleveland Indians as the Angels won 3-1. First, Cleveland batter got on the base because of an error, scored a wild pitch. In the end, though, Santana threw only 105 pitches, 76 strikes. Congratulations.

Tonight, we're hearing lots about compromise, potential compromise. But it isn't coming from lawmakers who are Tea Party favorites. We'll ask freshmen members of the House and Senate -- will that be changing?


KING: There's evidence tonight that House Speaker John Boehner is shoring up conservative report for his plan to raise the government's debt ceiling in exchange for some spending cuts. In a feisty exchange with his caucus just this morning, we're told Speaker Boehner promised to improve on his plan but also told the rank-and- file it needed to, quote -- forgive my language -- "get your ass" in line or risk undermining Republican negotiating leverage and his leadership abilities.

So, how successful was that rather blunt appeal? Well, we are hearing from a number of freshmen tonight, either that they will vote for the Boehner plan or they're open to considering it once they look at revisions being made tonight.

But even if the speaker's plan clears the House, it faces problems in the Senate, not just from the majority Democrats. Tea Party favorites in that chamber tonight say all of the leading plans are too timid on the issue of cutting spending and shrinking government.


SEN. JIM DEMINT (R), SOUTH CAROLINA: Folks, we've got to hold the line. We've got to stand strong. We can't let down the people who elected us last November.


KING: Also at that event was the Utah freshman Republican Senator Mike Lee.

Senator Lee joins us now from Capitol Hill.

Senator, just help us understand this moment. I know that you campaigned saying this is what you wanted to go to Washington to do, to control spending. And I certainly respect your campaign promises. Now, you're faced with this situation where you know you can't get everything you want. The Democrats control the Senate where you serve. You have a Democratic president.

Where's the give?

SEN. MIKE LEE (R), UTAH: Well, first of all, I want to make clear that it's not just some Republicans who have problem with this. "Politico" just reported that all 53 Democrats in the Senate intend to oppose this plan and I've also heard rumors to the effect that every Democrat in the House intends to oppose it. So, I'm not alone in that regard.

Nor is it all that extraordinary for us to suggest that we ought to move this forward in such a way that it doesn't have to become a political hot potato every time it's time to raise the debt limit. If we put a balanced budget amendment in place, this would help permanently solve the problem so it wouldn't have to be news anymore when we balanced the budget. It wouldn't have to be political drama every time we have to address a spending problem.

KING: But Speaker Boehner's plan would ultimately bring a balanced budget amendment to the floor of the House I believe it's in October. Leader Reid's plan in the Senate doesn't have a balanced budget amendment, the Democratic leadership doesn't want it, the president doesn't want it. Senator McCain, your colleague, I know you disagree with him on several issues. A lot of people watched it and say whether they are for or against the balanced budget amendment, Senator, I've lived and worked here a long time, it's not going to happen this year.

LEE: Well, John, a lot of people are saying that because they don't want a balanced budget amendment to happen. The fact is the only legislation that's made its way through one House of Congress is the Cut, Cap and Balance Act which calls for a balanced budget amendment as a condition to the president for raising the debt limit.

And as I explained in my book "The Freedom Agenda," there is no way we're going to get ahold of this problem, there's way that we're not going to have to come back to this well every few months in perpetuity until we constitutionally restrict Congress' borrowing power. It's the only way to do it on a permanent basis.

KING: But one of the questions -- and, again, there are those who are listening who would agree with you 100 percent, who are cheering you right now. There are others saying, I don't want a constitutional amendment to balance the budget, I wouldn't touch the Constitution for something like that. But the reality in Washington is, sir, again, it's just -- you know, maybe things will change but I don't see it happening.

The question is what next. And I want you to listen to Leader Reid here. And the reason I ask, it's an important policy consideration, but, politically, the Democrats are trying to have this narrative saying this new Tea Party guys came to Washington and they're going to destroy America by leading us into default.

Listen to leader Reid.


SEN. HARRY REID (D-NV), MAJORITY LEADER: Nobody believes that the Boehner plan is nothing but a big wet kiss to the right wing. And I mean the Tea Party, that's who I mean. It's too bad its caucus is being run by such a small number of people.


KING: I know you don't like the Boehner plan. But to that narrative from the Democrats, what would you say?

LEE: Well, first of all, there are so many things about the statement that are offensive and patently false I don't know where to begin.

But, again, the Democrats are against this plan. I don't quite understand what he means about it being a big wet kiss for the Tea Party movement of the Republican Party. That doesn't make any sense to me.

What does make sense is the cut, cap and balance plan is the only legislation that's been introduced in Congress, the only legislation that's received significant debate and discussion, and certainly the only piece of legislation that's been passed by one house of Congress. And yet, Harry Reid and the Democrats in the Senate refuse even to allow it to come up for debate and discussion.

If they don't like elements of it, they should amend it rather than going behind closed doors with four or five people in the room, with the press excluded, excluding them from the debate and discussion that the American people deserve to have.

KING: Take us inside some of the conversations in the Republican Party. You were just elected. You have a six-year term. You don't have to go back before the voters for some time.

As you know some of your House colleagues and friends who are directly linked or closely affiliated with the Tea Party movement, they face more pressure because they are up next year.

I want to read something -- he's a friend of yours. I know he's a supporter of yours, Erick Erickson, one of our contributors, wrote on today. "We sent to Washington a group of men and women to repeal Obamacare and cut Washington spending. Now, we're confronted with the fact that they want to pass off their obligations to another deficit commission, give Barack Obama a too clever by half pass at raising the debt ceiling, and claim they did all they could. But they haven't."

How tough, raw, are the internal tensions in the Republican Party between what I'll call some of you, the new members, and what -- my language -- the establishment?

LEE: There is no question, John, that this is an issue on which a lot of people disagree. There's no question also that every single member of Congress, in both houses, in both political parties, is concerned about this issue.

We understand that there are profound and very daunting consequences we may face if we pass August 2nd without raising the debt limit. But there are some of us who think that we also ought to be concerned about the rest that will confront us if we raise it too cavalierly and too reflectively, as we've done in the pass without putting in place permanent, binding structural reform mechanisms of the sort we need in the balanced budget amendment.

When you read the credit warnings issue by the credit reporting agencies like Standard & Poor's and Moody's, they made clear that we need a plan to get out of this and it needs to be permanent and it needs to be binding.

So, I think that we do face a significant risk if we just raise the debt limit without putting these measures in place.

So far, I haven't seen another plan that addresses this. So far, I haven't seen another plan introduced in bill form that's made any progress in Congress that raises the debt limit at all, other than cut, cap and balance.

KING: And if there's a plan in the next, say, 72 hours or so that's on the floor and your leadership is saying the clock is ticking, Senator Lee, this is what we need to do -- that does some of what you want but doesn't have the balanced budget amendment in it, (a), would you just vote no, is it a nonstarter, if it doesn't have the balanced budget in it; and (b), would you just vote no or would you try to use in the Senate, it depends on how it came to the floor, but every now and then you can use procedural tricks to try to block things? Would you just vote no or would you try to block it if you had that power, if it didn't have a balanced budget amendment?

LEE: Well, I would oppose it, and as I always say, in advance of the situation, and you alluded to this dynamic a minute ago, you can't identify in advance of the situation what procedural tools you might use, which procedural tools might be most effective or even available. And so, I'll hold off on that part of it until we get there. But I would oppose it.

KIGN: Senator Mike Lee, appreciate your insights tonight. We'll keep in touch in the next few busy days ahead.

LEE: Thank you.

KING: Take care, sir.

Now, the sluggish economy is just the biggest obstacle to President Obama's re-election hopes. But there are some big demographic changes that also complicate his 2012 strategy. We'll map those out, next.


KING: Is there an end-game to this big debate over the debt ceiling and spending cuts or will we get to the deadline, August 2nd, and perhaps the United States government, for the first time in its history, heading into default?

Let's discuss that and some new demographics, a new map showing us the intriguing 2012 campaign situation with CNN political contributors Alex Castellanos, he's a Republican consultant, and Cornell Belcher, Democratic pollster who worked for the Obama campaign back in 2008.

Let's start with this debt ceiling debate. You just heard Mike Lee, newly elected senator, Tea Party, knocked off an incumbent to come here to Washington. And I know the Democrats are saying why are these Tea Party guys getting in the way?

But they promised, Cornell Belcher, to do this. They promised to do this, to hold the line on spending. So they come here with an attitude that might be different than many members in Washington.

Listen to John Boehner. He did the conservative radio show, the Laura Ingraham show, this morning and he's talking about how some of these guys simply don't think getting to default without a plan is a horrible thing.

(BEGIN AUDIO CLIP) REP. JOHN BOEHNER (R-OH), SPEAKER OF THE HOUSE: Well, first, they want more. And my goodness, I want more, too. Secondly, a lot of them believe that that if we get past August the 2nd, we have enough chaos, we can force the Senate and the White House to accept a balanced budget amendment. I'm not sure that that -- I don't think that strategy works, because I think the closer we get to August the 2nd, frankly, the less leverage we have vis-a-vis our colleagues in the Senate and the White House.


KING: If Democrats came here with a specific promise and they were then told -- some of these guys were pressuring the House guys before they even had their vote on their plan, you have to compromise. They're keeping their promises. What's wrong with that?

CORNELL BELCHER, CNN CONTRIBUTOR: No. This is startling, I mean, on a couple of different fronts.

I assure you the American people didn't vote for these guys to come to Washington and take our economy over the edge. What's really startling about that is you have the speaker, the speaker of the House who literally cannot control his own caucus, and he's talking about members of his own caucus sort of out in full rebellion.

I mean, the American public did not vote for this. They did not vote for this sort of ideological trench warfare, which is what we're getting.

And, quite frankly, I don't think Speaker Boehner sort of thought this through either because right now he has no control of his caucus. He keeps putting out bills and they keep shooting it down. They end run around him to special interest groups outside of the capital to attack his plan. Unbelievable.

KING: He's making some progress tonight. And I gave you that question as t-ball.

Let me give you a question as t-ball as well. One of the problems is these guys want to keep their promises and they do control the House. So, they passed their plan in the House.

The question is: what happens next? You have a Democratic Senate, you have a Democratic president. They either compromise or they do look intransigent in the eyes of the American people.

ABC/"Washington Post" poll somewhere 77 percent, I think, say let's get a deal, get something done.

ALEX CASTELLANOS, CNN CONTRIBUTOR: And here's the good news. It looks like we are going to get something done. I talked a few minutes ago to a freshman Republican in the House, Congressman Tim Griffin from Arkansas, elected with a lot of Tea Party support. He's not only supporting this. He thinks it's going to pass. He thinks it's going to pass soon, tomorrow.

KING: This is the Boehner plan, just shy of a trillion dollars, but 917 --

CASTELLANOS: Because Republicans are wake up to something. One is they've achieved tremendous victory already. We're getting real spending cuts. No tax increases. And there's going to be a separate balanced budget vote soon after that. That's quite an accomplishment.

Republicans I think are beginning to understand that this is not skydiving where you get where you're going in one day. This is going to be a long battle. To do that, we have to win the Senate next time and replace Barack Obama.

And the choice now for Republicans in the House, Tea Party support or not, is are you with Boehner or are you with Obama?

KING: I want to show you guys something on the map. This I want to talk about that -- as this debate plays out and it's very important. One of the reasons the president wants to get a deal is he doesn't need any more jitters in the economy because he's already going to be running for re-election with unemployment somewhere probably in the 8s -- it's at 9.2 now. Most people think it will go down a little bit, but somewhere in the 8 percent to 9 percent ballpark which if you look at history means it's very hard to win re- election.

And then you have demographic changes happening in the country and I know both of you follow this quite closely. Let me get the map to come up here. Overall among white voters, this is what happened in 2008. Pretty much an even split. White voters, Republicans had a slight advantage.

This is a Pew Research Center survey saying look at this, a huge gain for Republicans among white voters heading in. This is 2011 -- of course, heading into the next cycle. Another big change is white voters under $30,000 a year.

Now, traditionally, lower income, a Democratic constituency. You see Democrats actually carried this subset in 2008. Now, Republicans have a little bit of advantage there.

And here's one of the obvious reasons. If you look at it -- you have a high unemployment rate among people at the bottom because a lot of people with college degrees and the like are coming out and they're taking jobs, taking jobs away from people who might not have it.

So here's -- this is partly on a "National Journal" study and Pew Research. These are states where -- and now the president's not going to carry some of these states. You'll see some Republican states and you'll say he's not going to win there. These are some states based on census data where the president can get a lower percentage of the white vote in 2012 than he did in 2008.

Now why can he do that? Why can he afford to get fewer white votes in the next election? Well, that's because the Latino population in many states growing and growing quite quickly. And if the president keeps close to the percentage he got in the last campaign, this is what happens. So, first, to Cornell first, let's start -- I want to get to the Latino demographic in a minute, but in terms of the president losing hugely, hugely, that's a huge problem in rural white America, and a lot of those big industrial Electoral College states.

Why is it happening?

BELCHER: Well, right now you have a real bad economy. You have a lot of voters who are pretty ticked off at Washington right now. You know, more so than I see it as a swing of the white vote per se.

Look, news flash: Democrats haven't won white voters since LBJ signed the Civil Rights legislation, and we probably won't win them anytime soon. However, that said, independent voters swung almost 15 points last time out -- last time around, and you see some of that going back and forth.

If you go back to 2006, those independent voters swung for us. You know, in a state like Pennsylvania where Casey won 55 percent of the white vote. Democrats didn't win 55 percent of the white vote last time around.

It is the independent voter ticked of about what they see in Washington they keep voting for change and you're going to see that pendulum swinging back and forth.

KING: And it's a complicated puzzle because the Obama campaign looking at these numbers says, OK, our numbers among whites are going to go down so, we need to keep our African-American turnout and we need to keep our Latino percentages because then the number of those voters are growing. And if you're out there and you're a smart Republican, you're saying no, we've got to try to get back and the immigration debate, other things hurt the Republicans with that constituency a few years ago.

But a conservative group, American Crossroads, went first, saying let's try to now start building up some support among Latinos. Here's their take.


KING: That ad targeted to obviously economic concerns to Latino voters.

Now, the Democratic National Committee doesn't want to let the Republican argument to Latinos go unanswered, so it responds with this.


KING: One of the things we're dedicated to doing here is improving everybody's Spanish in the next year.

It's a smart strategy for Republicans to try to get at that constituency. But is it a viable strategy? CASTELLANOS: Yes. And here's the good news for Republicans. Of course, we did very well with the Hispanic vote with George Bush. But the good news for Republicans is it doesn't matter if you're Hispanic, white, black, gay, straight, tall, short -- you want to eat. You want a job.

President Obama's losing support with everyone. That's what's opened the window for Republicans here.

The key line in that Spanish one is (SPEAKING SPANISH) -- we're losing work, we're losing our jobs.

KING: Mr. Belcher, you'll get a rebuttal next time. We're out of time.

The demographic changes fascinate me. They'll be great in the campaign to come and were going to spend a lot of time on them.

Alex, Cornell, thanks.

We'll see you back here tomorrow night. "IN THE ARENA" starts right now.