Ok, let's look at both the politics and the economics of this issue.
The underlying politics is as follows: the American people are sick and tired of deficit spending. The pundits are completely wrong when they downplay this issue, because deficits are FAR worse now than they ever have been in peacetime (10+% of GDP). And they got far worse at almost the exact moment Obama was elected president.
The practical politics looks like this: Congressional Republicans chose the otherwise-routine moment of a debt-ceiling increase to draw a line in the sand and press the deficit-reduction argument, on behalf of the American people. But by linking two things that don't really belong together (the political objective of deficit-reduction with the technical objective of funding the government), Republicans have backed themselves into a corner. Their position is strong on the merits but extremely weak in practical terms.
And the practical weakness of the Republican position arises from the economics of the issue. There's been a lot of argumentation of this point, most of it pure garbage spouted by people (including economists) who know little or nothing about capital-market dynamics or practical finance. I happen to know something about both, and I'm going to tell you the truth about the matter.
Point 1: A US default on debt service is pure unthinkable, FULL STOP. Larry Summers, for once, is absolutely right: a sustained debt default would very likely produce market disruptions comparable to, or worse than, the fall of 2008. However, at only about $200 billion and change per year, avoiding a debt default would be easy. The President, the Treasury Secretary and others are lying by omission when they fail to stress this point.
Point 2: A failure to increase the debt ceiling would produce a deep economic recession, almost instantly. We're talking about cutting out an amount of spending that's almost 10% of the economy. The 2007-09 recession only dropped the economy by about 6%. We really DON'T want a failure to increase the debt ceiling.
This leaves us with an unsolvable political dilemma. Neither the White House nor the Congressional Republicans want to back down. Implementing some version of the McConnell plan would be a pure victory for the president, as it would produce the same result as if Republicans had never taken up this fight in the first place: we'd have continuing high deficits, continued high spending, and no movement on the tax issue.
Clearly enough, McConnell is trying to solve the Republican's political problem in what he thinks is a clever way. He couldn't be more wrong. The only thing the public will see is that the president, against all prior expectations, somehow found the leadership skills to keep the Republicans from gutting Social Security and Medicare.
So the McConnell plan is, or should be, a non-starter. But so is a grand bargain to reduce deficits by cutting spending and (maybe raising taxes). There just isn't the time to put that plan together before August 2. Especially not a plan that wouldn't be like every other deficit-reduction compromise in history (that is, with tax increases now and spending cuts in some future that never seems to arrive).
But the issue of deficit reduction is of critical importance to the country. The president wants to get it off the table any way he possibly can, because the only thing he has to say about it is that our taxes are too low. As Walter Mondale could tell him, that argument won't get him re-elected.
So here's what Republicans should consider doing, in light of all the above:
Congress should immediately pass a ONE-MONTH extension of the debt ceiling, authorizing exactly enough additional borrowing to continue funding the federal government, at current spending levels. (No increases, not for COLAs, weather emergencies, war supplementals, or anything.) Include language directing both Congress and the president to continue good-faith negotiations aimed at finding a permanent solution to the problem.
Then, one month from now, DO IT AGAIN. Then in another month. do it yet again. Rinse, lather and repeat every month until either the president changes his mind about true deficit reduction, or the next election comes.
If the president should get fed up with this, or Senate Democrats fail to pass it in any given month, then he and they will have the privilege of explaining their intransigence to the American people.
This is the only way I can think of to avoid a market and economic catastrophe while continuing to keep the deficit-reduction issue front and center. Any other outcome takes the issue off the table permanently (or at least until interest rates blow up), and also hands a gargantuan political victory to the Democrats.