Grand Bargain Expectations

There were several interesting stories that caught my eye today, having to do with the prospects of a deal to avert the fiscal cliff and a possible grand bargain. One is from Matt Bai of the New York Times, who has written extensively about negotiations between House Leader John Boehner and President Obama during the summer of 2011.

He writes today in his piece, “Will Obama Agree to Entitlement Cuts? He Already Has”:

Labor unions and other liberal groups [. . .] message to the president, beginning with a meeting at the White House on Tuesday, is that he won a mandate to raise taxes on the wealthy while resisting cuts to Medicare and Social Security, and that they intend to stand firm with him on that position.

The problem here is that urging Mr. Obama not to join House Republicans in reducing entitlement spending is like pleading with John Travolta and Olivia Newton-John not to reunite for a Christmas album. It’s just too late.

[. . .]

So while it may be good strategy for progressive groups to pressure the White House on entitlement spending, no one should harbor the illusion that the president won’t sign off on reductions. The simple fact is, he already has.

This is a downbeat assessment of what may be coming. I think Matt Bai is correct in that Obama signed off on a deal with significant entitlement reductions in 2011, and that Boehner may feel that it would be an appropriate place to return to in the upcoming discussions. And if Obama was willing to make those entitlement cuts in 2011, why wouldn’t he be willing to in 2012? Furthermore, Matt Bai says that it wasn’t just Obama, but the liberal leaders of the House and Senate who were willing to sign off on his proposal in 2011. That upsets and surprises me.

However, I do think re-election can act as a reset. Obama certainly has greater leverage, and the subdued voices of his first term may not be so subdued in this second term. They did not elect Obama twice to get Republican tax and budget policies. We can see this in play on Obama’s insistence that the upper-income levels must have a higher tax rate. This was not in Obama’s memo during the summer of 2011; to the contrary, Obama seemed to have been willing to actually lower tax rates on the rich. This now seems to be a non-starter for current negotiations.

The Huffington Post spoke to several of the people who were in the meetings with the White House today:

Following the meeting, a handful of attendees spoke briefly to the press, praising Obama for vowing to firmly oppose an extension of the tax cuts for the wealthy.

“It was a very, very positive meeting,” said AFL-CIO President Richard Trumka.

Additionally, Obama’s current offer on the table would have vastly more revenue than what was on the table in 2011. That is, $1.6 trillion, twice what was originally being discussed in 2011. How far he moves from this number is still up in the air. In the past Obama has proven a not-so-great negotiator, but there’s also evidence that he has significantly improved his skills and position since the summer of 2011.

From the Washington Post:

Senior Democrats, meanwhile, threw cold water on a competing proposal to scale back deductions that disproportionately benefit upper-income taxpayers while keeping the top tax rates at their present level.

On Tuesday, former Clinton administration Treasury secretary Robert Rubin wrote in the New York Times that closing loopholes and deductions would not be an acceptable solution to the nation’s fiscal challenges. And Sen. Patty Murray (D-Wash.), who is set to become chairman of the Senate Budget Committee, said she “has not seen how the math works to let you come up with the additional revenue.”

And the New York Times says that Obama will take his message directly to the public, if needed:

As he prepares to meet with Congressional leaders at the White House on Friday, aides say, Mr. Obama will not simply hunker down there for weeks of closed-door negotiations as he did in mid-2011, when partisan brinkmanship over raising the nation’s debt limit damaged the economy and his political standing. He will travel beyond the Beltway at times to rally public support for a deficit-cutting accord that mixes tax increases on the wealthy with spending cuts.

Also in Obama’s plan is 340 billion in entitlement savings. I have no details on what these exactly entail. I may lose sleep over what happens in the next several weeks.

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No Deal

The narrative being told right now in the media is strange: Boehner and Obama must compromise and find common ground for the good of the American people. Or so I’m told. I’m always a bit incredulous when I hear this storyline repeated. Consider the situation in the simplest of terms: Obama/Democrats want some cuts and some revenues through tax increases for the rich, and Boehner/Romney/Republicans refuse to raise any revenue to help solve a deficit problem. This is a binary outcome, so I’m not sure there’s that much room for compromise. You either get more revenue, or you don’t. In fact, much of the criticism of Obama from the left during the summer of 2011 was that Obama’s position of $1 in revenue for every $3 in cuts was already a position of severe compromise that many in his own party were not comfortable with. Based on a recent document obtained by Bob Woodward of the Washington Post, I’d say it’s absolutely true, he was willing to give up way too much. I’m actually astounded by the number of programs for the vulnerable he was willing to cut. It was completely antithetical to what the people who elected him wanted protected. And Boehner still wouldn’t take the deal.

The Republican position seems to have moderated, ever so slightly. Previously, their position was one of no new revenue. Recall the infamous Republican debate where no candidate, including Romney, would take a deal that gave $1 in tax increases for every $10 in spending cuts.

Here is Boehner with Diane Sawyer last week following the election:

I made clear yesterday, that raising tax rates is unacceptable, and frankly, it couldn’t even pass the House. (coughs) I’m not sure it could pass the Senate. So the votes aren’t there. What I did yesterday was lay out a reasonable, responsible way forward to avoid the fiscal cliff, and that’s through putting increased revenues on the table, but through reforming our tax code, and I would do that if the President were serious about solving our spending problem and trying to secure our entitlement programs.” [Bold for emphasis].

And so, there is the so-called “fiscal cliff”, in which all of the Bush tax cuts at every income level will revert back to the higher rates of the 1990s, along with cuts in defense spending. That is, if no deal is reached before the start of 2013.

This is ultimately a game of chicken. Obama has the upper hand, given that in virtually every campaign stop and debate, he repeated his plan to increase taxes on the well-to-do. Oh, and he ended up winning the election. Boehner probably knows that, but maybe he thinks fear of the fiscal cliff and a recession will force Obama to cave. Obama can simply repeat the strategy from early 2012, where the extension of the payroll tax cuts was on the table. Republicans refused to deal without corresponding cuts, and they ultimately caved and received the bulk of the blame for not getting something done faster. Or, by letting the fiscal cliff happen first, and letting all tax rates increase, Obama could then pass middle-class tax cuts. Technically, Boehner will not have raised taxes; the Bush tax cuts simply expired on their own, and he then helped pass a middle-class tax cut. Perhaps this would be a way of saving face before someone like Grover Norquist.

The fiscal cliff happening is preferable to the grand bargain that Obama proposed in 2011. So as a liberal, I would rather see this come to pass, with tax rates rising on me and everyone else, rather than cuts in spending and programs on the most vulnerable.

Ultimately, something probably will get done. What should a deal look like? It should look nothing like the grand bargain of 2011. There shouldn’t be $1 in revenue for every $3 in cuts.

Obama should have several demands for revenue in whatever deal that gets passed. Preferential treatment of capital gains and the carried interest deduction should be removed. According to the CBO, these account for 0.5% of GDP.

For those making over $250,000, there can be a strict limit on the number of deductions they can use to ensure they do not pay an effective rate far below what they “should” be paying. This can be similar to what Romney proposed in his campaign. Only, you know, without the massive cuts in tax rates for the rich.

Letting the high-income tax rate revert back to 39% would also gain about $42 billion in revenues in 2013 alone.

There should be work done on gradually limiting the tax exclusion of employer-sponsored health insurance benefits. This is the single greatest tax expenditure, and it costs the Treasury $240 billion a year. The Affordable Care Act has made some progress in this area, but a deal could build on those gains. This is important since this tax exclusion can lead to over-use of health services, which ultimately contributes to the problem of rising health care costs.

There can also be gradual limits or caps in terms of the mortgage interest deduction for people of all income levels.

There also have to be cuts in defense spending.

These are the items that can and must go in a new grand bargain. Social Security should have only minor touches, if it is included at all. Neither Social Security nor Medicare should increase the age of eligibility to receive benefits. The low-income, blue-collar individuals who need those programs the most have not really experienced the increase in life expectancy that those in upper-income brackets have had.

It would be great if Obama sticks to these demands and does not cave. I’m hopeful, as his strategy has changed significantly since the “grand bargain” failed in the summer 2011. However, looking at the memo Bob Woodward unearthed, I can’t help but worry.  I’m reminded that civic duty is less about voting on election day and more about holding the person elected accountable every single day. To give them a friendly reminder of who they are representing.