Memo leaked by Bob Woodward says "grand bargain" would have directly cut Medicare and Medicaid by $425 billion

Bob Woodward leaked the deal memo from the proposed 2011 grand bargain, which didn’t happen for a number of reasons, none of them being Barack Obama’s reticence to cut a deal.

In addition to cuts to things like TRICARE and Pell grants and veteran retirement, the “sequester” — the punishment for Congress not reaching a deficit resolution — would have directly cut Medicare and Medicaid by $425 billion (including $150 billion in raising Medicare premiums) and a permanent 20% reduction in tax rates on the top bracket (from 35% to 28%), with four total tax rates (10%, 15%, 25% and 28%). Increases in the Medicare eligibility age were in the plan, as well as the chained-CPI change to Social Security cost of living adjustments, a net benefit cut.

This was what the President signed off on, before the Gang of Six embarrassed him by calling for more revenue. He was perfectly willing to not only endorse this deal, but force the Democratic leadership to swallow it as well. And this is why Ryan Grim can be so sure that the next set of talks will include reductions in benefits to the elderly, the poor and the middle class. That’s what happened before, after all.

You can get a good sense of what the White House thinks of the post-election landscape in this passage from John Heilemann, colored no doubt by his personal hatred of liberals:

To bring home a grand bargain, Democrats will have to compromise, too. But among the party’s congressional leaders, “the fact that there is going to have to be entitlement reform has been internalized,” says one of the savviest Democratic lobbyists in the capital. And while there will no doubt be some resistance on the left, this person adds, “Obama doesn’t give a damn about those people—he will happily throw them under the bus. That’s what reelection really means for him: He no longer has to worry about his base, about labor, about his left flank.”

For Obama, the political appeal of striking a grand bargain is easy to see, for it would make an ideal bookend to health-care reform—the latter a long-held liberal dream, the former a centrist fantasy so delicious it might bring Pete Peterson to climax. But it is also essential to the country’s economic health, and not just in terms of taming our deficit, but in freeing up resources for the kinds of investment in human capital and infrastructure that are critical to America’s global competitiveness and domestic prosperity (and that should be priorities for any sane progressive, unless they believe that a government that boils down to nothing but a wealth-transfer system from the young to the old is somehow desirable).

Any sane observer of economic reality understands that the biggest concern in the near term is that the deficit will end up to small, not too large. We don’t have a deficit problem but a health care cost problem, and it’s not entirely clear we even have that as much as we have a CBO which over-hypes the health care cost problem in their models (the fact that CBO wanted to talk with Naked Capitalism’s Yves Smith for daring to question their model is quite telling). We have countless examples of counter-productive austerity in a time of a slowly recovering economy.

At any rate, we cannot depend on the intransigence of the right this time around. Bill Kristol floated acceptance of higher taxes on the wealthy, following David Koch from a couple months ago. And John Boehner reportedly brought the hammer down with his caucus:

Their party lost, badly, Mr. Boehner said, and while Republicans would still control the House and would continue to staunchly oppose tax rate increases as Congress grapples with the impending fiscal battle, they had to avoid the nasty showdowns that marked so much of the last two years.

Members on the call, subdued and dark, murmured words of support — even a few who had been a thorn in the speaker’s side for much of this Congress […]

Aides say this is an altered political landscape that Mr. Boehner did not expect. As a result, whether the nation can avoid the so-called fiscal cliff will depend not only on whether Mr. Boehner can find common cause with a newly re-elected, invigorated president, but also whether he can deliver his own caucus.

“I just believe John will have more leeway than in the past Congress,” said Representative Peter T. King, Republican of New York. “The election will matter.”

Obama keeps pointedly avoiding the tax rates issue, and conservatives are clinging to what they view as a concession. We already see from the 2011 memo that Obama is not wedded to those tax rates. The memo provides the blueprint, and there’s not much time left to stop it.

David Dayen

David Dayen