Top tier emerges as GOP nomination race enters a defining phase

Reporting from Des Moines and Waterloo, Iowa— 

The new top tier of Republican presidential contenders has emerged to reset the 2012 race and raise new questions about exactly where an angry GOP base will take the party in next year's election.

The contest is now a three-way, multilayered match, withRick Perry and Michele Bachmann rising to challenge each other and national front-runner Mitt Romney, after the Texas governor formally declared his candidacy and the Minnesota congresswoman won the year's biggest organizing test.

Bachmann and Perry capitalized on their new prominence by appearing together for the first time at a party dinner in Waterloo, Iowa, late Sunday. The event opened a new and potentially defining phase of the nomination race: their head-to-head battle for the social and religious conservatives who dominate early-state caucuses and primaries.

Those tests, it seems increasingly clear, will be decided by an electorate fed up with Washington's dysfunction and deeply worried that the U.S. is in decline economically and as a world power.

Party activists in Iowa, in a warning to the establishment of both major parties, forced Tim Pawlenty to abruptly quit the race Sunday, by dealing him a weak third-place finish in a straw poll Saturday that boosted Bachmann to the head of the field in the leadoff caucus state.

Pawlenty said on ABC's "This Week" that voters were "looking for something different" from what he was offering as "a rational, established" two-term Minnesota governor with a "strong record of results, based on experience governing." Other Republicans said his low-key, guy-next-door image was no match for Bachmann's crowd-pleasing fire.

Bachmann said Republican voters were sending "a strong message to Washington." They "want us to get our house in order, financially speaking" and "they want someone who is going to fight for them," she said on CBS' "Face the Nation."

Candidates from the party's establishment wing who had been expected to challenge for the nomination have been faltering in the early going. Besides Pawlenty, former House Speaker Newt Gingrich and former Utah Gov. Jon Huntsman Jr. have failed to take off, though the latter two remain in the race.

Rep. Steve King, an Iowa Republican who is among Bachmann's closest friends in Congress, noted that establishment candidates fared poorly in the straw ballot, drawing only about 1 in 5 votes cast by nearly 17,000 Iowans.

That reflected, in part, a decision by Romney and Huntsman not to compete aggressively at the event. Still, Bachmann and others, including the second-place finisher, Rep. Ron Paul of Texas, are tapping a strong undercurrent of outrage over business as usual in Washington. And those taking part in the straw poll almost certainly represent the social and evangelical Christian conservatives who will be a majority at the caucuses next winter.

"The debt ceiling vote is part of the long continuum of Republicans not standing up to do the hard things necessary" to turn the country around, said King, one of the most conservative House members, criticizing GOP members who, unlike himself and Bachmann, agreed to raise the debt limit this month. Bachmann supporters "know she will do the hard things."

In Waterloo, both Perry and Bachmann played to outsider sentiment by defending "tea party"activists.

"The tea party has been the best antidote to the out-of-control spending we have seen," Bachmann said. "The tea party has done something else for us too. They pointed out the unbelievable level of debt we have."

Perry, making his first stop in Iowa, faulted those who say the tea party is "angry."

"We're indignant at the arrogance and audacity this administration is showing about the values that are important to the people of America. We're indignant about a government that borrows trillions of dollars because they don't have the courage to say no," he told Republicans gathered for a party fundraiser.

Neither candidate addressed the other; Bachmann arrived after Perry spoke, and when she concluded her speech Perry quickly left the building without shaking her hand.

At a campaign stop earlier Sunday in Manchester, N.H., Perry said that he was "one of those citizens in this country that is very frustrated with a federal government that does not listen."

The governor also took a swipe at Romney, telling New Hampshire's largest TV station that Texas' record of job growth under his leadership "doesn't need any propping up," an allusion to Massachusetts' low rate of job creation while Romney was governor.

That jab was an early illustration of Perry's intention to challenge Romney and Bachmann at the same time. If he succeeds, he could be well-positioned to build a substantial edge once the primaries begin, albeit at the risk of coming under a dual assault.

Perry's entry poses a difficult challenge for Romney, who has been skirting Iowa, where he lost to former Arkansas Gov. Mike Huckabee in 2008 despite an expensive, all-out effort.

The Texas governor will fill the void left by Pawlenty for "a serious candidate who could actually become president," said Tim Albrecht, communications director for Iowa Gov. Terry Branstad, a Republican.

Perry will likely have the financial resources that Pawlenty lacked, which finally drove him from the race, as well as the potential to build support among both evangelical Christians and fiscal conservatives.

Bachmann, alternately, could get the jump on the field if she can hold off Perry and transfer her success in Iowa to other early-voting states, especially South Carolina and Florida.

GOP strategist Mike Murphy, a former Romney aide, said the Massachusetts governor faced "a tough call" in Iowa. Murphy said Romney might be able to eke out a caucus win if conservatives divide their votes among Bachmann, Perry and others. Or the populist anger spurred by economic distress could spread from activist events into the presidential primaries, with unpredictable results.

Obama, congressional leaders seek leverage from economic jolt

Reporting from Washington— 

The jolt to America's prestige as an economic superpower so far has only hardened positions in Washington, as President Obama and congressional leaders are seeking to use the downgrade in America's credit rating to gain leverage in the next round of the battle over the federal debt.

Obama spoke Monday at midday, as the Dow was skidding toward a 634-point drop, and portrayed Standard & Poor's decision to downgrade U.S. credit on Friday as proof that political paralysis "could do enormous damage to our economy and the world's."

In his first public comments since S&P cut America's coveted AAA credit rating to AA+, Obama said the nation could reduce its deficit and jump-start the economic recovery if there was "political will in Washington." He called upon the nation's political leadership to stop "drawing lines in the sand."

But by day's end, there was no indication that compromise was in the offing. Indeed, House Majority Leader Eric Cantor(R-Va.) sent a memo to House Republicans on Monday urging them to hang tough.

"There will be pressure to compromise on tax increases. We will be told that there is no other way forward. I respectfully disagree," Cantor wrote. Spending, he said, must be reduced: "This is why we were elected."

The No. 3 Democrat in the House, James E. Clyburn of South Carolina, made clear his party's view that a deficit reduction package must involve "shared sacrifice" — code for tax revenue increases.

Congressional leaders have until next week to appoint a "super committee" of 12 lawmakers — six from each party — to come up with a proposal to cut the federal deficit by at least $1.2 trillion by Nov. 23. If the new committee deadlocks, or if it makes recommendations that Congress fails to pass, 10 years of cuts in federal agency budgets would be triggered automatically, including a steep decline in Pentagon spending.

With differences over spending and taxes appearing unbridgeable, it may take the 2012 election to end the impasse. Voters may provide the answer to a question that has consumed Washington for months: Which side has the best approach to relieve the U.S. debt crisis?

A foreshadowing of the 2012 race may come Tuesday in Wisconsin as voters go to the polls: Half a dozen Republican state senators face a recall election that could put Democratsback in control of the upper chamber.

The contest in Wisconsin, an important swing state, is partly a referendum on the policies of Republican Gov. Scott Walker, who signed a bill this year stripping many public workers of collective bargaining rights. But both sides have also cast the fight as part of the larger, national struggle between Democratic and Republican approaches.

Obama, speaking from the White House State Dining Room, said he hoped the rating downgrade would prod both parties to seek a compromise. He also sought to reassure nervous investors that the U.S. remains a "AAA country."

People seem worried. A CNN poll released Monday found that 60% believed the U.S. remained in an economic downturn with conditions continuing to worsen. Only 36% believed that in April. Just 24% believed things are going well in the U.S., compared with 75% who believed things are going badly, the poll showed.

Both parties say they want to create jobs, but again, there is no consensus on how to go about it.

Obama reiterated his call for extending a payroll tax cut that expires at the end of the year. He also called for extending unemployment insurance benefits and reviving the hard-hit construction industry by rebuilding the nation's highways, bridges and ports.

Republicans already have dismissed some of the proposals this year. And GOP lawmakers have no appetite for anything that smacks of new spending.

"On job creation, we need to reduce the regulatory burden, prevent tax hikes and make it easier — not harder — for job creators to start hiring again," said Sen. Mitch McConnell of Kentucky, the Republican leader, in a statement after the president's remarks. "The country needs economic growth and fiscal responsibility, not higher taxes and new Washington spending and regulations."

Action will have to wait, though. Congress is in recess until after Labor Day, and Obama is not asking lawmakers to come back early.

Some wish he would take that step.

Robert Reich, who was Labor secretary under President Clinton, said in an interview: "For the good of the country and for his own political future, he's got to be seen as making jobs his first and major priority. And I fear he's not doing that."

Obama officials attack S&P's credibility after downgrade

(Reuters) - The Obama administration attacked the credibility of the analysis underlying Standard & Poor's decision to downgrade the United States' top credit rating on Friday, saying it had found a $2 trillion error.

S&P was forced to remove the number from its analysis after Treasury officials discovered that the rating agency's estimates of the government's discretionary spending was $2 trillion too high, sources familiar with the discussions said.

There was evident dismay, and some anger, within the Obama administration at S&P's decision to downgrade U.S. debt despite the errors officials said they had found in the calculations.

"A judgment flawed by a $2 trillion error speaks for itself," a Treasury spokesman said after S&P cut the long-term U.S. credit rating by one notch to AA-plus on concerns about growing budget deficits.

The comment marked the first time the U.S. Treasury had publicly chastised S&P. Administration officials have privately grumbled that the rating agency's understanding of the U.S. political system was unsophisticated.

David Beers, the top S&P official behind the ratings decision, told Reuters in an interview that any change in the rating agency's calculations would have been taken into consideration before the decision was made public.

Sources familiar with talks that took place between S&P and the U.S. Treasury on Friday afternoon said the rating agency had wanted to see $4 trillion sliced from future budgets as part of a hard-fought deal secured earlier this week to lift the nation's debt limit. That agreement would reduce deficits by $2.1 trillion over 10 years.

Even after the error was pointed out, the rating agency declined to hold off on its downgrade, sources said.

With the threat of a downgrade looming, Treasury officials earlier in the week had played down the potential impact and said markets already were aware it was under consideration and that two other agencies were maintaining their triple-A rating.

The Federal Reserve effectively shrugged off the downgrade, saying it would not affect the operation of the central bank's emergency lending window or its buying and selling of Treasury securities to conduct monetary policy. The Fed can only extend emergency loans to banks against good collateral.

PLENTY OF FINGER POINTING

Treasury officials, who spoke on condition of anonymity, said on Wednesday that top bond dealers were questioning S&P's credibility, which took a heavy blow during the 2007-09 financial crisis when mortgage-related debt lost much of its value after originally being awarded high ratings. The reputations of two other big rating agencies, Fitch and Moody's, were also tarnished.

Ian Lyngen, a senior government bond strategist at CRT Capital Group in Connecticut, agreed S&P now had more than just a credibility problem.

"The fact that they have now downgraded the United States suggests to me that they are now going to be dealing with a relevance issue," he said. "Because the fact of the matter is that 10-year (Treasury note) yields are near 2.5 percent, and that in no way suggests a lack of sponsorship for U.S. debt."

Yields on U.S. 10-year notes, a benchmark for borrowing rates throughout the economy, fell as far as 2.34 percent on Friday -- their lowest since October 2010 and very low by historical standards.

POLITICAL POINT SCORING

Lawmakers used the downgrade to square off over how best to rein in the nation's budget gap, with Democrats saying more revenue was needed and Republicans focusing on spending cuts.

S&P's action "reaffirms the need for a balanced approach to deficit reduction that combines spending cuts with revenue-raising measures," said Senate Majority Leader Harry Reid, a Democrat from Nevada.

House of Representatives Speaker John Boehner, a Republican from Ohio, called the downgrade "the latest consequence of the out-of-control spending that has taken place in Washington for decades."

Sen. Jim DeMint, a leading conservative, went further, saying Treasury Secretary Timothy Geithner should resign.

The White House maintained silence, but Dan Pfeiffer, Obama's communications director, signaled the administration's strategy -- to put the blame on the Republicans -- when he added bits of media commentary to his Twitter.com feed, an increasingly common vehicle for transmitting the White House viewpoint.

One "retweet" he sent from a Washington Post columnist said, "This didn't happen because an earthquake wrecked our factories or a plague hit our workers. It was Congress. Particularly (Republicans)in Congress."

Another "retweet" from a Fox News reporter read: "Remember President Obama pushed for a 'Grand Bargain' that would have cut approximately $4 trillion in debt, but Speaker John Boehner walked."

A Republican-led congressional panel is probing whether the administration had tried to influence S&P before the rating agency revised its outlook on the U.S. debt rating to negative in April.