By Tom Curry National affairs writer
msnbc.com
updated 8/8/2011 7:17:23 PM ET 2011-08-08T23:17:23

The downgrading of U.S. government bonds by Standard & Poor’s has become a campaign-shaping event for President Barack Obama and whoever his Republican adversary turns out to be. In fact, it's ensured that the 2012 election will be fought on the battlefield of debt and unemployment.

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The reverberation from that demotion means that Electoral College math (270 electoral votes needed to win) is now on a collision course with budget math (trillions of dollars in reduced spending and increased taxes), and labor market math (14 million unemployed).

Of the 10 states that now have the highest unemployment rates, Obama won six of them in 2008.

Four of them — Nevada, Florida, Michigan, and North Carolina — account for nearly a quarter of the electoral votes needed to win the presidency.

Obama targets states on high-unemployment list
The states which Obama campaign manager Jim Messina has identified as 2012 targets are the ones Obama won in 2008 but where Republicans won statewide races in 2010: that list overlaps in part with the high-unemployment roster: Nevada, North Carolina, Michigan, and Florida.

With the United States now in what S&P calls “an era of fiscal stringency and private-sector deleveraging,” that fiscal stringency is daunting for Obama’s re-election chances. Cuts in federal spending to reduce the government’s debt will likely slow economic growth in the short run, according to the Congressional Budget Office.

Video: Worst one-day point drop since Dec. 2008 (on this page)

Fiscal stringency will be bad news for job-seeking voters in states such as North Carolina, Michigan, and Florida that Obama needs to win next November.

Deficit reduction vs. economic growth
But Obama contended Monday from the White House that “there are plenty of good ideas about how to achieve long-term deficit reduction that doesn’t hamper economic growth right now.”

And he said, “By coming together to deal with the long-term debt challenge, we would have more room to implement key proposals that can get the economy to grow faster,” such as extending the current reduction in the Social Security payroll tax and providing unemployment insurance to those on the brink of exhausting their benefits.

Video: Obama: US is still a AAA nation (on this page)

Together those two steps would supply a stimulus of about $170 billion for one year — compared to the $830 billion four-year stimulus which is now beginning to taper off.

The next significant political moment comes next week when the top four congressional leaders announce their appointees to the new joint committee that will in November recommend another $1.5 trillion in deficit reduction.

Obama acknowledged on Monday that there was skepticism that the members of the joint committee would accomplish anything. But in an allusion to the S&P downgrade he said, “My hope is that Friday’s news will give us a renewed sense of urgency.”

Who will serve on new 'super-committee'?
Might that committee produce the compromise that Obama seeks?

Here’s one test: Whether the committee includes at least one Republican who has supported increases in revenues — not necessarily achieved through higher income tax rates, but through a simpler, more efficient tax code — and at least one Democrat who has supported cuts in entitlement spending that go beyond those assumed in last year’s health care overhaul (which aims for about $500 billion in reduced Medicare outlays over the next ten years).

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If the joint committee wants significant reductions in entitlements costs, it might need to rethink the Democrats’ landmark achievement of 2010: health care reform. For instance, starting in 2014, the health care overhaul expands Medicaid by 17 million beneficiaries (about a one-third increase), with $627 billion in new spending in the first ten years.

Former Wisconsin Sen. Russ Feingold, who flirted with running for the Democratic presidential nomination in 2008 and who now leads a group called Progressives United, told his supporters, “We must make sure the Democrats appointed by Harry Reid and Nancy Pelosi are willing to hold the line, insisting on new revenue and no cuts to Social Security or Medicare benefits.”

Obama didn’t use the word “cuts” Monday, instead offering the calming phrase, “modest adjustments to health care programs like Medicare.”

Loyal Democratic voters will be eyeing that committee to see if proposed Medicare and Medicaid cuts would indeed be “modest” or threatening to them.

Not just Obama on the ballot
It’s not just Obama on the ballot in 2012, it’s also Democrats in places such as Michigan and Florida. Both of those states have incumbent Democratic senators running for re-election, who need to turn out the Democratic base to win.

With Obama’s problems mounting on all fronts, the economic advisors and programs of the GOP presidential contenders might begin to become more relevant. After all, one of these people might be running the nation’s finance in January of 2013.

But for the moment, Republicans have the luxury of accusing Obama of not doing enough, despite their own rejection of Keynesian programs such as the $830 billion stimulus.

Slamming the president in Iowa Monday, former Minnesota Gov. Tim Pawlenty said, “Unfortunately he spent the first two and a half years of his presidency trying to pass an unconstitutional health care bill and doing things like trying to shut down the Guantanamo Bay ... and he should have been working on growing jobs and getting the economy moving and doing the types of things that Standard and Poor’s was wanting him to address.”

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Video: Worst one-day point drop since Dec. 2008

  1. Transcript of: Worst one-day point drop since Dec. 2008

    WILLIAMS: Good evening.

    BRIAN WILLIAMS, anchor: This was a dark day for the nation's finances and for millions of Americans with a financial stake in the markets, the very same Americans who are still processing the fact that our country has lost its top credit rating . Here's

    the damage from today: The Dow down over 634 points, that's the sixth largest point drop in its history, the worst since '08. Nasdaq lost just about 7 percent of its total value. S&P 500 lost 6.6 percent of its value in one day.

    WILLIAMS: The president went on television at midday to reassure Americans , but the damage was done. The markets continued to drop while he spoke, and the damage continues. It's a bigger systemic problem with no real end in sight. We begin our coverage tonight with CNBC 's Maria Bartiromo . She's at the New York Stock Exchange . Maria , you won't see many days like this one in your lifetime.

    MARIA BARTIROMO reporting: It's true, Brian . What day today on Wall Street . After last week's sell-off and the credit downgrade by Standard Poors late Friday, anxieties had mounted over the weekend and all eyes were on Wall Street this morning. Stocks dropped right at the opening bell on Wall Street as the selling that started Thursday just kept going. Not a single stock on the S&P 500 ended in positive territory.

    Unidentified Reporter: That's really bringing the market into the red.

    Mr. ART CASHIN (UBS Director of Floor Operations): There's concern that the S&P downgrade may do something to consumer confidence and thereby ease us a little closer to the infamous double dip that everybody's worried about.

    President BARACK OBAMA: Good afternoon, everybody.

    BARTIROMO: President Obama came out to reassure investors.

    Pres. OBAMA: This is the United States of America. No matter what some agency may say, we've always been and always will be a AAA country.

    BARTIROMO: And while the markets sold off another 400 points after the president's speech, sales of US Treasuries remain strong, easing fears that interest rates might rise on mortgages, cars and student loans.

    Mr. PETER FISHER (Blackrock, Inc.): If the world's a risky place and investors are going to shed risk, they're not going to shed the least risky asset, which is still US Treasury securities .

    BARTIROMO: In an attempt to avoid a recession in Europe , the European Central Bank bought bonds to keep Spain and Italy afloat, but that may not be enough.

    MICHELLE CARUSO-CABRERA reporting: There's going to be a bigger burden on France and Germany . And the question is do they have enough money, do they have the will to bail out the other countries?

    BARTIROMO: Some investors sought safety in gold, sending gold prices up more than $61 to a new record high, while oil closed just above $81 a barrel.

    $61.40 $1,710.20 Today

    $5.57 $81.31 a barrel

    Mr. DAN ARBESS (Perella Weinberg Partners): Look around, the compass is spinning and investors are being turned upside down.

    BARTIROMO: Despite the chaos, investor Dan Arbess sees one possible advantage to the downgrade.

    Mr. ARBESS: Some day we will thank S&P for the credit downgrade. Is -- it is a message to Washington that we must begin to address the long-term solvency of the United States of America.

    BARTIROMO: Next big event to watch, the Federal Reserve will meet tomorrow in its regularly scheduled meeting. Investors will be paying close attention to see if the fed says anything about the economy and whether it requires additional stimulus right now, Brian .

    WILLIAMS: All right, Maria Bartiromo starting us off from the floor of the exchange. Maria , thanks.

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