The Next Grand Bargain Negotiations Will Begin January 1
I know there’s a lot of outside pressure on Congress to reach a wide-reaching agreement in the lame duck session on taxes, federal spending and social insurance programs, one that will trade the expiring tax and spending measures for the long-awaited “balanced solution.” The truth is that nothing’s going to happen in the lame duck. That’s the meaning of Barack Obama’s pledge to veto anything in that lame duck that doesn’t allow tax cuts on the top marginal rates to expire. It doesn’t mean that January 1 represents the end of the discussion, however; it represents the beginning.
Basically, the Obama Administration (and this is all contingent on them winning the election) has decided to take the advice of a lot of folks on the left and use the leverage inherent in the way the fiscal slope operates. With no plan, all the Bush tax cuts expire, including the tax rates on the wealthy. This turns around completely the dynamic of the negotiation. Instead of trying to decouple the top marginal tax rates with the other ones, Democrats could offer a pure tax cut package to compensate for whatever they feel should have been extended. And Republicans will be in the position of rejecting a tax cut for a broad mass of the American people.
But that’s not all the White House wants to do. The sequester will also begin if there’s no agreement, with the cuts split between defense and discretionary programs, but programs for the poor like Medicaid, as well as Social Security and the bulk of Medicare (there’s a 2% across-the-board cut to reimbursement rates), held harmless. The payroll tax cut will expire (and save your breath, AARP, that ship has sailed). Extended unemployment insurance benefits will expire. The alternative minimum tax for the 2012 tax year will not be patched. Tax extenders for a variety of businesses will not be extended.
The Obama Administration looks at that prospect and sees a leverage opportunity.
I’ve called this the GOP’s dual-trigger nightmare. It’s bad for the economy, but it also effectively ends our deficits with a mix of tax increases and spending cuts more progressive than anything any Democrat has dared propose. Republicans absolutely can’t let it happen. But the only way they can stop it from happening is to make a deal.
The administration hopes this deal will include more than just deficit reduction. They also see it as a vehicle for infrastructure investment and tax reform. They think there’s some chance that parts of the American Jobs Act, like the hiring tax credits, could sneak through the door, too. There’s even talk of using it to address climate change, though everyone agrees that’s unlikely. Whatever ends up in the final deal, there’s little doubt that it will be a big deal, and it’s likely to come together fairly quickly in the first year. The White House — and the expiring tax and spending provisions — won’t give Republicans any other choice.
In a way, the Obama administration’s plan for a second term is much like their plan for the first term: Make a deal with Republicans. Get a big bipartisan solution to our problems. But the means are almost precisely the opposite. Where in the first term, the hope was that they could reach out, talk through the issues, and come to an agreement, the plan for the second is to push the Republican Party off the fiscal cliff, and then force them to reach out in order to get pulled back up.
I think it’s wrong to distrust the source here. This is the plan. The sweeteners to the grand bargain will be some infrastructure investment and maybe job creation tax credits.
But what this is really called is a budget. In other words, the Obama Administration will do nothing in the lame duck, nor will their allies in Congress, and then, they will propose a large mix of spending, tax and social insurance changes – i.e., a budget. The budget will attempt to make trade-offs that supplant the tax rates and spending cuts from the fiscal slope.
The question becomes why, if this is such an advantageous position for Democrats to find themselves in, is it necessary to loop in programs like Medicare, which was substantially altered by the Affordable Care Act in ways that we don’t know will work yet, and Social Security, which has nothing to do with the budget? The answer: because. The elites want a deal on these issues, and the Administration thinks they’ve figured out a way to secure that deal.
People can go home for the holidays, visit with family. After January 1 is when the real work on this will begin.