January 1, 2013
If the budget gods had their way, the 112th Congress would mercifully conclude its deliberations today on a major budget deal to blunt the worst of the fiscal cliff and then fade into history.
We’re not so lucky. After weeks of futile negotiations, Vice President Joe Biden and Senate Minority Leader Mitch McConnell scrambled last night to finalize a deal that prevents most Americans from getting clobbered by substantial tax increases and enduring the pain of across-the-board cuts in government programs.
Few on Capitol Hill smiled upon seeing the terms of the agreement. But the Democratic Senate gritted its teeth and passed the measure 89 to 8 almost two hours into the new year, a largely bipartisan vote with the most prominent Republican objectors being Sen. Marco Rubio of Florida--a possible presidential contender in 2016--and Tea Party favorite Sen. Rand Paul of Kentucky. The contentious GOP-controlled House is scheduled to take it up today, guaranteeing only to consider the measure just two days before the new 113th Congress gets sworn in.
The White House acceded to tax hikes starting at $450,000 -- an effort to appease anti-tax Republicans by backing down from the $250,000 level that President Obama had long called for. The deal would delay the $109 billion in sequestered budget cuts for two months, essentially moving the drop off the cliff that was due to start today. Republicans wanted the cuts in defense and domestic programs to take effect by March while the Democrats favored waiting a year or more before they begin to bite into the economy.
But the dust will not potentially settle on the budget for months. Should the deal pass the House, fights will likely continue over raising the $16.4 trillion debt ceiling, entitlement spending, the trajectory of the deficit and even taxes. When Obama addressed the nation on Monday from the White House, his tone veered toward the combative. He promised Republicans that additional tax increases must be part of any plan to shrink future budget deficits—as negotiations will likely continue over the borrowing limit.
“Now, if Republicans think that I will finish the job of deficit reduction through spending cuts alone,” Obama said, “then they’ve another thing coming. That’s not how it’s going to work. We’ve got to do this in a balanced and responsible way. And if we’re serious about deficit reduction and debt reduction, then it’s going to have to be a matter of shared sacrifice. At least as long as I’m president. And I’m going to be president for the next four years, I hope.”
With that in mind, here are five critical lessons from the last-second bargain to avoid the fiscal cliff:
GOP Has The Debt Ceiling– The government officially reached its borrowing limit yesterday, forcing the Treasury Department to revert to “extraordinary” steps to keep the government operating for about two months.
In other words, lawmakers might as well be glued to their seats at the bargaining table. Republicans see a clear advantage on this unsettled element of the fiscal cliff. Obama needs their blessing on an increase to the debt ceiling, or else the country defaults.
“The big battle is yet to come and it’s over the debt ceiling,” Sen. Johnny Isakson, R-Ga., said in a Monday floor speech. “That’s the one where we have to find a way to make a deal. And the president is not going to make a deal by poking us in the eye.”
In return for lifting the government’s borrowing capacity, GOP lawmakers plan to extract massive spending cuts and entitlement reforms—something they could not achieve when taxes were still part of the fiscal cliff.
By agreeing to extend the George W. Bush-era tax rates for almost 99 percent of the country, Obama no longer has that bargaining chip. When Obama last confronted similar circumstances in the summer of 2011, the federal government almost defaulted and was downgraded—while the White House backed down from its demands.
Steve Bell, a former Republican Senate aide now at the Bipartisan Policy Center, interpreted Obama’s remarks as a declaration that he will oppose the structural changes needed to programs such as Medicare and Medicaid that have surging expenditures.
“It is my judgment the debt ceiling is a much more serious matter than the fiscal cliff,” Bell told The Fiscal Times. “They’re in different galaxies. We could have gone off the fiscal cliff and with the economy the way it is we might have had a slight recession. You know what would happen if we went a couple of days without paying the interest on our public debt.”
Obama’s Weakened Hand – For weeks, Obama has successfully griped that Republican lawmakers blocked a move to continue the Bush-era rates for middle class Americans. The need to raise the debt ceiling will now lead to Republicans claiming his refusal to trim spending threatens the country.
Liberal pundits such as The New York Times’ Paul Krugman, the Washington Post’s Ezra Klein, and others all howled that the president will be forced to fold on the debt ceiling. Otherwise, he risks a global economic crisis that would consume his final term.
The public perception that Obama can negotiate from a place of strength is eroding.
“The emerging deal will reinforce the convictions that have made the GOP such a toxic presence in Washington,” wrote The New Republic’s Noam Scheiber. “If Obama will cave even when he’s got all the leverage, when won’t he cave? Never, the Republicans will assume.”
However, Obama Didn’t Entirely Cave on Taxes – Liberal Democrats like Iowa Sen. Tom Harkin fumed that Obama retreated on tax rates. Instead of the higher rates starting at $250,000 as the president first pushed for, the White House consented to them beginning on individual incomes above $400,000 and family incomes above $450,000.
The Democratic anger is understandable given Obama’s campaign rhetoric, but somewhat misplaced. All the focus has been on incomes, when it’s really the rates themselves that matter. And this deal largely preserves the core of the Obama plan.
The president initially backed a modest rate increase from 33 percent to 36 percent on household incomes above $250,000. He wanted to charge 39.6 percent on incomes above $398,350—and that top rate is reportedly intact as part of the potential deal that starts at roughly the same level.
According to analysis by the Tax Policy Center, almost 90 percent of the total revenues under the two-tiered plan would come from incomes above $1 million. Just 0.7 percent of the additional revenues were derived from Americans earning $200,000 to $500,000.
Obama’s main target was always millionaires, rather than those with six-figure incomes but middle class lifestyles. By keeping the 39.6 percent rate in place, the president largely achieves that objective. The open question—which will be answered by analysis from the Congressional Budget Office—is how much revenue the compromise would actually generate.
Public Pressure Failed to Help Obama – When the fiscal cliff talks started after the Nov. 6 election, Obama tried to leverage voter sentiment against Republicans in order to get a deal. People may be disgusted by the dysfunction in D.C., but the push to rally the public with campaign-style appearances proved about as successful as the short-lived revolution started by French college students in the musical “Les Miserables.”
Gallup’s editor-in-chief Frank Newport explained why in a Sunday blog post. Multiple polls showed that about two-thirds of the country wanted lawmakers to compromise their principles in order to reach an agreement. But while those who described themselves as moderate or liberal overwhelming favored compromise, just 39 percent of “very conservative” Americans did, according to polling by Gallup.
The electorate is not evenly distributed. And more conservative voters reside in Republican congressional districts, so Obama’s attempts at outreach never brought enough pressure onto the individual GOP lawmakers who felt more loyalty to their constituents.
Newport concluded, “Enough representatives apparently believe that a) their constituents want them to stick to their principles and not compromise and b) it is their duty to represent their constituents rather than the totality of the American population, to logjam the effort to reach a compromise in the House.”
The Grand Bargain Is Dead, But a Bunch of Small Deals Doesn’t Help Much – Obama all but acknowledged Monday that the kinds of comprehensive budget plans promoted by his own Simpson-Bowles commission won’t happen.
“I have to say that ever since I took office, throughout the campaign, and over the last couple of months, my preference would have been to solve all these problems in the context of a larger agreement, a bigger deal, a grand bargain -- whatever you want to call it,” Obama said at the White House yesterday. “But with this Congress, that was obviously a little too much to hope for at this time. It may be we can do it in stages. We’re going to solve this problem instead in several steps.”
Let’s interpret that statement. Because Congress cannot agree to a comprehensive package that attempts to balance the competing interests, Obama now assumes that breaking everything down to where the conflicts are more pronounced will fix the situation. It’s possible, but not probable, according to many budget experts. The failure of a grand bargain doesn’t mean that a package of agreements is likely—only that it’s the last available option.
“A small deal solves virtually nothing,” Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, said last weekend. “We still have to find ways to cut spending, reform entitlements, raise more revenues and get the debt under control.”
Welcome to 2013.