November 14th, 2012
Inspired by The time for a debt deal is now (Erskine Bowles, Washington Post 11/08/12 page A19) and Obama makes opening bid on taxes: In debt talks, he’ll seek $1.6 trillion from corporations, the rich (Zach Goldfarb and Lori Montgomery, Washington Post 11/14/12 page A1).
In the President’s opening bid
The outlines of a deal are hid.
If you want to know,
Read my prediction below.
Here’s my summary of what President Obama is proposing and what I predict that means for a deal, based on this and previously released tidbits:
1) Boehner previously agreed to $800 billion increased revenue (he’s since tacitly renewed that offer), so given President Obama’s opening bid, the increased revenue range is $0.8-1.6 trillion.
2) Based on the Pres’s previously announced 2.5:1 cuts: revenue split, the revenue increase will have to be at least $1.2 trillion in order to beat the minimum $4 trillion deficit reduction target that everyone is aiming for, and which Wall Street and international markets are expecting. Coincidentally (or not), that’s also exactly halfway between Boehner’s and Obama’s offers. That suggests net spending reductions of $3 trillion.
3) Allowing the Bush tax cuts to expire for high-earners will yield $829 billion in additional revenues. If the President sticks to that full amount, that means up to an additional $770 billion in revenue increases ($370 billion if Obama and Boehner “split the difference”) that will need to come from loophole closing. If Obama accepts the $500K threshold proposed by Tim Kaine and others, that limits the impact to the top 1% (instead of the top 2% for the current $250K threshold), but reduces the revenue gain to about $500 billion, which means an additional $700 billion (splitting the revenue difference) would have to come from loophole closing and other revenue measures. I predict that will come in the form of a two-stage deal in which the parties agree to the partial Bush tax cut extension in either the lame duck or early January, with the loophole closing to follow with legislatively-required tax reform.
4) There will definitely be entitlement reform, probably consisting of (a) increasing the Medicare eligibility age from 65 to 67, (b) gradually increasing the retirement age from 67 to 69 (as Simpson-Bowles does), and (c) changing Social Security and other COLAs to a chained-CPI approach. Those changes, which I believe are reasonable given the increase in life expectancy and the need to restrain growth in costs, would result in about $1.4 trillion in savings over the next 10 years. The New York Times’ Ezekiel Emanuel proposed a very interesting way to reform Medicare and Social Security which probably won’t be considered, but should be: have graduated eligibility based on lifetime earnings, so high-income individuals would be eligible later. This recognizes the fact that wealthy individuals live longer (equalizing years of receiving benefits instead of eligibility age) and also solves the problem of increasing eligibility ages for manual workers (since most of them are low-mid income). It’s also a cleaner, fairer way to link benefits to income. There’s no estimate of how much this would save but it would clearly be more, so I’m going to spitball it at $2 trillion over 10 years.
5) The sequester has already enacted cuts of $1.5 trillion in discretionary spending, divided equally between defense and non-defense. I predict that the final deal will stick broadly with those numbers, or to numbers close to them, but will rejigger, restructure, and re-time them in order to minimize the economic and political pain. (I would personally prefer and think it would be better for the economy and our fisque in the long term if we (a) moved some of those cuts from social programs to defense and/or (b) if we restore some of the defense funds (and possibly even if we don’t), consider running infrastructure expenditure through the Defense appropriation (read Don’t Cut Defense for more about that).
6) The fiscal cliff includes $120 billion in payroll tax waivers for 2012 that also expires on Dec. 31. Last year, that money was paid into the Social Security Trust Fund from general revenues in order to avoid compromising the Social Security Trust Fund’s financial health. Some seniors’ groups oppose extending the payroll tax waiver because they feel it risks weakening Social Security in the future. They also oppose any changes to Social Security, correctly arguing that Social Security is not part of the deficit. The combination of these two factors allows for an interesting approach: the payroll tax waiver could be extended (either for the full year, or initially for just six months at a cost of $60 billion) without an offset from general revenues. Instead, that extension would be more than offset by increasing the retirement age to 67 and modifying the benefit COLA. That measure (which is one of the most effective and immediate the government take) would therefore not represent any increase in discretionary spending.
7) That leaves the kicker, and from an economic growth perspective, perhaps the most important part of the deal. The is the jobs/stimulus/infrastructure/investment component that the President has repeatedly referred to. It will be in there: the needs, which ideally should be at least a trillion. Yes, that’s a big number, but we need it. And when you look more deeply, it actually improves our long-term fiscal health (read Why the GOP Should Push Short-Term Spending for more about that). I think it would be miraculous if Obama were able to negotiate that trillion, but I do think he’ll be able negotiate a good chunk of it. I predict that the likely outcome will be in the $500-800 billion range.
Assuming $4.2 trillion in total deficit reduction, $1.2 trillion increased revenue (the “split the difference” magic number), $3 trillion in net spending cuts, $1.5 trillion in rejiggered sequester cuts, and $2 trillion in entitlement cuts results in a jobs package of $500 billion. Not a bad start, and it could be further improved on with a few hundred extra billion in revenues and/or long-term spending cuts.
Note also that the bigger the jobs package is, the bigger our long-term deficit reduction will be, which I propose be added to our political lexicon as important measure of policy impact, and that it be defined as the budgetary impact for the decade following the current 10-year budget period. For example: a $800 billion jobs package results in $5 trillion in long-term deficit reduction, which would probably grow to at least $6 trillion for the 2023-32 period due to increased economic growth. That’s not bad.
So that’s my prediction.