CNN has reported that Harry Reid is working on his own debt limit proposal that would cut deficits by $2.5 trillion total, include no revenue increases, and raise the debt limit by that same $2.5 trillion amount. Reid, Nancy Pelosi, the President and Vice President are scheduled to meet in the White House tonight starting at 6pm ET. Aides stressed that this would satisfy two key demands of the House GOP. It would have the dollar-for-dollar relationship between spending cuts and an increase in the debt limit; and it would not include revenue.

It sounds to me like the Democrats feel they need a counter-offer to what John Boehner will propose. We know that Boehner wants to call the President’s bluff and offer a mechanism with a short-term debt limit increase combined with spending cuts, and a Catfood Commission II that would be tied to the next tranche of debt limit increase. So Reid’s proposal would be that counter-offer, giving Republicans most of what they asked for.

Given the numbers used here, I would guess that the outline of the cuts would be similar to what Nancy Pelosi suggested in a meeting with bloggers on Friday. It hinges on an accounting gimmick that would “reduce” deficits based on drawing down the wars in Iraq and Afghanistan. Because CBO essentially calculates the cost of war based on the previous year’s cost, by capping war spending at a lower number you “save” a good deal. As Pelosi described it, that could add up to $1 trillion to the total savings.

So you can get to $2.5 trillion pretty easily, then. Take the $1 trillion from the wars, add $1.2 trillion in agreed-to cuts from the discretionary budget, and add $200-$300 billion from foregone interest payments and you’re there.

This is obviously not a great deal, with its $1.2 trillion in cuts to the discretionary budget (we don’t know exactly where those cuts will fall). But compared to digging into entitlements, it’s better than some of the other ideas. It’s not clear whether the Reid plan would have a Catfood Commission II process attached; I would hope that it wouldn’t. If it doesn’t, then revenues and entitlements would be put aside, and the final result accomplished with $1.2 trillion in spending cuts and a big accounting gimmick. The other big unknown here is WHEN those spending cuts would fall, and that’s important. If too many of them are in the immediate term, namely in fiscal year 2012, that could have a seriously negative impact on the economy. Remember, when confronted with a Republican budget plan that would have cut $100 billion from the 2011 budget, independent analysts said that would cost the economy between 700,000 and 1 million jobs. The same level of cuts would produce the same bad outcomes in FY2012.

This would allow the real debate about taxes and the safety net to be decided by VOTERS, not commissions or other extra-Constitutional processes. The 2012 elections could make the determination. The public could have a voice. And the expiration of the Bush tax cuts, which would raise $4 trillion over a decade, would be the forcing mechanism.

I’m sure Republicans would find a way to reject this, maybe by saying it doesn’t get to the root of the deficit problem. The fact is that we don’t have a deficit problem, we have a jobs problem. Therefore none of these solutions are really palatable from an economic perspective. But as long as Reid’s plan doesn’t include a Catfood Commission II time bomb, it’s an improvement over most of what’s on offer. That fact alone shows how far to the right this debate has gone.

…Incidentally, Boehner’s going to miss his self-imposed deadline lest the “Asian markets” freak out. He said he’d announce something tomorrow. By the way, the Asian markets are not yet freaking out at all.

I went to the Asian markets today, they had some great cherimoya and fresh pears, but nobody there had ever even heard of the debt limit!