Tuesday, May 17, 2011

No Roadmap for Deficit Negotiations

I've been on a short hiatus from thinking about "Gridlock" for two reasons: First, the killing of bin Laden occuppied my professional attention for the past two weeks. More fundamentally, however, it has been difficult to get a solid grip on what is happening with the deficit talks. Clearly, there is no road map for what we are engaged in right now. No one, from the President on down, has gripped the steering wheel and asserted control. I daresay that no one really knows how this is going to turn out.

Consider all the moving parts.

Vice President Biden is leading talks with congressional leaders focused on identifying a set of spending cuts and other mechanisms that could attract sufficient votes to raise the debt limit, which we officially hit yesterday at about $14.294 trillion. The Treasury Department has predicted dire consequences unless the limit is raised at the absolute latest by August 2 (though it seems that Secretary Geithner now regrets informing lawmakers that he could use extraordinary measures to make it to this date without a crisis). A growing number of citizens and lawmakers are now doubting whether such a crisis would ensue and are threatening to use the leverage of the debt limit to maximize their fiscal agenda and hold out to the last possible moment or beyond.

A group of senators -- now the Gang of Five since Tom Coburn dropped out today -- has been working for months to put a long range budget package together that would address entitlement spending and tax reform to make significant defict reductions by 2014 and bring our debt to GDP ratio below 40 percent by 2035 (it is now 62 percent, and that is before the baby boomers' Medicare and Social Security costs kick in). They are working off the outline of the Bowles Simpson Commission, but even with this detailed game plan in place, the talks appear to be at an impasse.

The House has passed a budget that called for dramatic spending cuts over the next decade-- but its leadership is now running away from the Medicare reforms that fueled much of those savings because (surprise, surprise) they are unpopular.

Senate Budget Committee chairman Kent Conrad has been unable to craft a budget plan that could get through his committee because Democrats are divided on the ratio of spending cuts to tax increases that such a plan should contain. Even if it could get out of committee, there is no certainty that Democrats could unify behind a plan on the floor. Senator Ben Nelson announced he will not vote for a plan that contains tax increases. Many liberal members will not vote for a plan that fails to raise taxes. Regardless of whether the Senate acts, it is a virtual certainty that there will not be a budget resolution agreed upon by the two chambers this year.

Speaker Boehner called last week for trillions in spending cuts to justify a vote to increase the debt limit and at least one dollar in spending cuts for every dollar increase in the debt limit. It will take about $2 billion in new debt to get to the end of 2012. Boehner made clear that he would not support any deal that had any tax increases to achieve deficit reduction. President Obama urged Senate Democrats to "remain flexible" on all aspects of the negotitions. But Majority Leader Reid said that Social Security would not be considered in this round of talks. Vice President Biden said that "everything" is on the table.

The punditocracy expresses confidence that the debt limit vote eventually will pass -- but no one has provided any semblance of an idea of how the deal gets done or what it looks like. In the past week there has been much discussion of spending caps and deficit caps (see Brooks' "Let's Go Caps!) as procedural reforms that could form the foundations of a deal to get us beyond the current difficulties. The idea of capping spending at the average of the past 8 years of 20.6 percent of GDP -- promoted by Senators Corker and McCaskill -- has been rejected by the White House because the baby boomers' retirement will undoubtedly require increased spending in the coming decades. A cap at the proposed level would crowd out spending on everything else. Deficit caps are feared by Republicans, who see them as a route to possible automatic tax increases to meet the cap.

The harsh reality is that with all the speechifying, capifying, calls for trillions in savings, and debt limit machinations -- you can't address long term budget trends without bringing down health care costs or reducing the amount of health care we consume. If nothing else, the harsh debate over Obamacare demonstrated with clarity that both the public and the political parties are nowhere near agreement on whether or how to do this. It is difficult for this commentator to see how the cuts of the magnitude that are being bandied about can be achieved without this public debate on health care, which is certainly not how we are going to be spending this summer.

The complexity of the issues, the enormity of the debt problem and the high stakes politics -- where possible default is being used as political leverage to achieve policy and political goals -- means that we are in very unchartered waters. Readers should view with caution any commentary expressing confidence and certainty on how this will play out over the next couple of months.

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