Today on the Fiscal Slopes
Politico’s VanDeAllen team have a exclusive inside must-credit-Politico rundown of the fiscal cliff talks that merely recycles known information and makes a bunch of guesses.
Cut through the fog, and here’s what to expect: Taxes will go up just shy of $1.2 trillion — the middle ground of what President Barack Obama wants and what Republicans say they could stomach. Entitlement programs, mainly Medicare, will be cut by no less than $400 billion — and perhaps a lot more, to get Republicans to swallow those tax hikes. There will be at least $1.2 trillion in spending cuts and “war savings.” And any final deal will come not by a group effort but in a private deal between two men: Obama and House Speaker John Boehner (R-Ohio). The two men had what one insider described as a short, curt conversation Wednesday night — but the private lines of communications remain very much open.
They actually get to $1.2 trillion on taxes by adding the $800 billion Boehner offered last year and the $1.6 trillion Obama “first offer” and dividing by two. Insiders!
Their total adds up to $2.8 trillion, which is plausible, because about $1 trillion is already baked in through the spending cap agreed to last year. War savings can account for as much as $1 trillion on its own, and that’s largely an accounting gimmick, so you’re talking about a 2:1 ratio of new tax hikes to new real spending cuts.
As for social insurance, Democrats keep saying loudly and publicly that they will not abide by any cuts to Medicare benefits. Dick Durbin, of all people, hit the Senate floor to argue against an increase in the Medicare eligibility age yesterday. But VanDeAllen say everyone knows Dems will cave. However, they add that the White House doesn’t want to get sucked into proposing the cuts again:
There is only one way to make the medicine of tax hikes go down easier for Republicans: specific cuts to entitlement spending. Democrats involved in the process said the chest-pounding by liberals is just that — they know they will ultimately cave and trim entitlements to get a deal done.
A top Democratic official said talks have stalled on this question since Obama and congressional leaders had their friendly-looking post-election session at the White House. “Republicans want the president to own the whole offer upfront, on both the entitlement and the revenue side, and that’s not going to happen because the president is not going to negotiate with himself,” the official said. “There’s a standoff, and the staff hasn’t gotten anywhere. Rob Nabors [the White House negotiator], has been saying: ‘This is what we want on revenues on the down payment. What’s you guys’ ask on the entitlement side?’ And they keep looking back at us and saying: ‘We want you to come up with that and pitch us.’ That’s not going to happen.”
This is precisely the story WaPo is pitching today, so it’s fairly credible as far as these insider accounts go. Of course, the idea that you have to make “the medicine go down” by trading tax hikes for Medicare cuts just isn’t true. The taxes will go up regardless on January 1. Then you can pass the “Obama tax cuts” and really be done with this. The sequester, which nobody wants to go forward, can be cancelled. That’s actually a possible path here, only cut off by elites who would rather offload some of their tax increases on the poor and the elderly.
VanDe Allen claims that the cuts will come from “a combination of means-testing, raising the retirement age and other ‘efficiencies’ to be named later,” and that Harry Reid will fight including Social Security in the deal. The cuts wouldn’t kick in until between 10-20 years from now if Democrats have their way, which means that holding current seniors harmless is a bipartisan condition in Washington.
Finally, the White House has promoted adding stimulus measures to the deal, but they’re focused on more ineffective business tax breaks to encourage hiring, which didn’t perform very well in 2011.
Erskine Bowles is pessimistic that a deal can be reached before the end of the year, which I guess is a good thing. Lawmakers only have 10 more days of floor time scheduled for the year. And there are a number of must-pass items that haven’t even been considered yet.
I should point out that we don’t need a grand bargain and this quixotic quest to get one harms the country.
The problem is that the quest for the grand bargain is essentially a quest for the impossible. Whereas ginning up crises to force Congress to strike that impossible bargain is wreaking real tangible harm on the country. Whatever happens during the lame-duck session, the best thing for America would be for the great and the good in Washington and corporate America to drop their fixation with the grand bargain.
The grand bargain is impossible because it’s not possible for today’s Congress to bind the hands of future congresses. In 1997, for example, President Bill Clinton and House Republicans struck a grand compromise that reduced capital gains rates and expanded health care for children. By 2003, the budget framework of 1997 was completely obsolete, thanks to two rounds of Bush tax cuts and two new wars. The deal between Clinton and Newt Gingrich didn’t bind new leaders and didn’t foresee new circumstances. Nothing members of Congress agree to in 2012 or 2013 is going to change the fact that the 2019 budget deficit will be determined by the will of the politicians in office at that time and the situation they face.
And the current situation is that weak demand is giving us low and stable inflation plus low interest rates. This is not a problem that deficit reduction could solve. The sensible policy solution is to focus on the illness we have right now, and let decisions about long-term tax hikes and spending cuts be made later, when the patient is healthy.
Pretty much sums it up.
Photo by Tom Jenssen under Creative Commons license.