Waiting for Super Congress

August 4th, 2011

 A follow-up to Naming Names, with my further thoughts on goals and tactics to improve the Super Congress’s chance for success.

 

When you’re waiting for Superman, it’s best not to wait too long

Because you’ll be left in the lurch if he doesn’t come along.

 

When the all-cut debt deal first came out, I, like other Dems, had high hopes that the Congressional Super-Committee would offer another bite at the revenue apple. Unfortunately, after I delved into the details (that is after all where the Devil is), I came to the conclusion that those high hopes are mostly baseless.

Why? Because the “trigger” if the $1.5 trillion in deficit reduction is not reached is $1.2 trillion in across the board cuts, with some exemptions (Social Security, Medicare beneficiaries, Afghanistan, and Iraq, but notably not other defense spending), leaving Republicans with little incentive to agree to significant revenue increases. However, all is not lost.

For both Dems and Republicans, the theoretical trigger is that automatic cuts are so distasteful, that both sides have a strong incentive to avoid them. That is partially true: automatic cuts are arbitrary and thus have greater potential to inflict pain on constituents, and hence (indirectly) on office-holders.

This strength of this incentive is however reduced because each has the inherent fallback position that it might be able to rejigger cuts in future budgets, or even eliminate them, especially if it does well in the 2012 election. Since that ability is uncertain, the incentive remains to avoid the trigger if at all possible. However, that incentive has limits, which will shape the Super Congress’s negotiations and likely outcomes.

If both sides take a win-win approach, it would be relatively easy to develop and agree on a menu of $1.2 (or even $1.3-1.5) trillion in cuts that does less economic and political damage than the automatic $1.2 trillion. But if either side takes a zero-sum approach, then the situation changes, with both Dems and Republicans engaging in a game of budgetary chicken, trying to force the other side to bear more of the pain and share less of the gain. This is of course the Republican game of choice, and they seem to be doing very well at it lately (not surprising, given how much practice they’ve had). The GOP penchant for and past success with zero-sum negotiation therefore further weaken the incentive, unless Dems use effective tactics to counter likely Republican intransigence.

Republicans, as always, are strongly opposed to any new revenue, and even more so to any increase in tax rates. Since the spending cut trigger is very close to the deficit reduction target (“only” $300 million separates the two), they have relatively little to gain from agreeing to revenue increases, and higher tax rates seem completely out of the question. However, given Republicans’ traditional pro-defense attitude, they might agree to small revenue increases in the form of eliminating some loopholes and tax expenditures in return for shifting cuts away from national defense.

For example, a pro-defense Republican who is at least minimally open to eliminating some loopholes and tax expenditures (e.g., Tom Coburn) might agree to $300 billion in increased revenue from loopholes and tax expenditure reduction for a $300 billion reduction in automatic defense cuts, which would be equivalent to 50% of the automatic defense cut. Coincidentally, that $300 billion would also be the amount necessary to bring the total deficit reduction up to the $1.5 trillion needed to avoid the trigger.

While this approach runs up against the innate GOP opposition to increased revenues in any form, it does present a clear trade-off to pro-defense Republicans: is $1 in defense spending worth $1 in revenue. For man old-line Republicans, the answer to that question might just be yes (in fact, for them it’s often the only form of government spending they consider worthwhile).

However, this approach, while positive to Dem committee members in one way (inclusion of some increased revenue in the package), is negative in another: it would require that the amount cut from non-defense discretionary spending be increased from $600 billion to $900 billion, which Dems have little incentive to allow, and little (if any) wiggle room to make.

One possible Dem counter-proposal would be to ask Republicans to agree to extra revenue on a more than 1:1 basis in order to avoid the automatic defense cuts. For example, resuscitating the $800 billion in increased revenues that Speaker Boehner initially agreed to with President Obama would fill the $300 billion gap and allow defense cuts to be reduced from $600 billion to $100 billion. That level of revenue increases would be a godsend for Dems. but would still require significant politically difficult and economically damaging cuts to domestic non-defense discretionary spending.

But in my view, a scenario in which Republicans would agree to more than $300 billion in revenue measures is highly unlikely. Dems should therefore not get themselves internally worked up to expect a “fair” outcome. Yes, it’s not unreasonable to say that half of the $1.5 in stage 2 deficit reductions should be in the form of increased revenue. It wouldn’t even be unreasonable to say that half of the full $2.4 trillion (and hence almost all of the stage 2 amount) should be in the form of new revenues. But given how the debt committee has been structured, that just ain’t gonna happen. In fact, even getting $300 billion would be a good outcome for Dems. (Of course, Dems can still take the public and negotiating position that $1.2 trillion in increased revenue is what’s fair, but that negotiating position should be with the realization that it won’t be attainable.)

As I see it, there are three ways to get around this logjam, avoid the automatic cuts, and allow revenues to be a more significant part of the package:

1)      Include changes to entitlement programs,

2)      Throw the Bush tax cuts into the mix as a carrot to Republicans, or

3)      Either/both of the above, and go bigger in total deficit reduction.

With just option 1, Dems could agree to $700 billion-$1.2 trillion in entitlement changes, in return for $300-800 billion in increased revenues (loophole and tax spending elimination), for a total of $1.5 trillion in deficit reduction. This would potentially leave discretionary spending untouched by stage 2 cuts, which I personally believe would be economically and fiscally preferable to allowing discretionary spending to bear their full burden, as was the case with the debt deal stage 1 and the 2011 shutdown cuts.

Option 2 would be the most likely way to convince Repubs to put revenues on the table, but I would be against it, unless structured as part of a broader tax reform deal through which negotiators could obtain a big chunk (e.g., $3 trillion) of the projected ~$4 trillion in revenue from the scheduled expiration of the Bush tax cuts. But in my view, the timing is not yet right to attempt that. As Ezra Klein pointed out in yesterday’s Washington Post, unless Republicans believe (which they currently don’t) that President Obama will stand firm and allow all of the Bush tax cuts to expire, their inclusion does not add significant leverage.

Also, President Obama promised during his presidential campaign that he would not raise taxes on anyone making under $250K. That puts him at a further negotiating disadvantage, since Republicans can hold the working and middle class tax cuts hostage to the upper class ones, as they successfully did in December 2010 (although Obama did get a few other goodies thrown in on top of the working/middle class tax cut extension). And as Ezra points out, Dems are deceiving ourselves and the country almost as badly as Republicans are if we keep pretending that just letting tax cuts for the rich expire is enough to solve our fiscal problems (that’s about $800 billion of the about $4 trillion over ten years from letting all the Bush tax cuts expire). We need to either let all of them expire, or implement tax reform that minimizes marginal rate increases, but captures all or most of the revenue that full Bush tax cut expiration would.

Of those two approaches, the latter is the better option, and that’s clearly been Obama’s plan all along (that’s why he keeps talking about tax reform). But in terms of timing, I believe Obama’s hand will be strengthened to achieve a better result sometime next year, rather than this year in conjunction with the debt deal. A further benefit to splitting the negotiations is that any revenue (even if it’s only $300 billion) obtained in debt deal stage 2 will be in addition to the $3-4 trillion in increased revenue that Obama will hopefully be able to achieve with tax reform pursuant to expiration of the Bush tax cuts.

And in Graham-Rudman terms, if Obama can cut a deal that generates $3 trillion in increased revenue, that would leave $1 trillion on the table to potentially fund infrastructure investments.

So, that leaves option 3 as my recommendation for Super Congress: go big to the tune of $3 trillion in deficit reduction (twice the current $1.5 trillion target) by putting entitlement reform on the table in return for $300-800 billion in increased revenue (anything in that range would be a win, though the top end is obviously better for Dems and our fiscal health), but probably leave the Bush tax cuts off the table for now.

***

Here’s the trailer from the movie which inspired our title, Waiting for Superman. Unfortunately, in real life, even when he shows up, Superman can’t always save the day. Or, as with Michelle Rhee, Superman comes, but isn’t allowed to get the job done.

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