Split the Difference and We Could Have a Cliff Deal
Business + Economy

Split the Difference and We Could Have a Cliff Deal

REUTERS/Kevin Lamarque

After weeks of suspense, accusations, and jockeying for position, President Obama and Republican House Speaker John Boehner met Sunday afternoon at the White House to continue discussions over how to avoid a year-end fiscal crisis, their first in-person gathering in nearly a month.

Aides to Boehner confirmed the meeting took place but were tight-lipped about what, if anything, took place to move the needle on a solution. “We’re not reading out details of the conversation, but the lines of communication remain open,” Boehner spokesman Michael Steel told the Washington Post.

As business leaders and Americans from every rung on the economic ladder sweat out what most see as intractable positions on both sides, the two leaders haven’t budged from their original fiscal cliff proposals. But if you squint, you can almost see the makings of an agreement.

The White House and GOP lawmakers have each placed an opening bid with plans to reduce the deficit by about $4 trillion over the next decade.  But the two sides are still far apart on how much to raise new tax revenue from high income earners (Democrats), and how much will come from spending cuts (Republicans)—in particular, reductions to sacred cows like Medicare.  It’s possible, however, to see the contours of an agreement if they were to split the difference on taxes, entitlements, spending and the debt ceiling.

Steve Rattner, the Wall Street investor and former advisor to the Treasury Department on the auto industry, observed last week in an interview with The Fiscal Times that an agreement is only doable if the Republicans are willing to move toward the Democrats on taxes, and the Democrats are willing to move the Republicans’ way on spending and entitlements.

Possibilities are floating through the media right now. Obama has been calling on Republicans to extend the expiring Bush-era tax cuts for 98 percent of the country, a move the GOP has resisted since that would amount to a de facto tax hike next year who compose the top two percent of earners. But if Republicans don’t agree, everyone would be hit by a $200 billion wave of tax increases.

The Washington Post suggested a potential “cover” for the GOP in an article last week, if the Republican majority in the House was willing to vote on two measures.  Step 1 would continue the tax breaks for the 98 percent (what Obama wants), showing voters and the media that the House was not the obstructionist the Obama camp made them out to be.  Step 2 would keep the lower rates across-the-board. That way, the GOP could symbolically hold onto its position, while opening a door to stop a calamity that might have the country flirting with recession.

Former Rep. Robert Walker, R-Pa., a close ally of former House Speaker Newt Gingrich, told The Fiscal Times that pulling off that stunt would require a lot of help from congressional Democrats and have Boehner depending on a minority of his caucus.

“The question is whether the President is willing to use his muscle to get all the Democrats to go on the second bill with only a handful of Republicans supporting that,” Walker said. “Because you need 20 to 30 Republicans that are kind of willing to vote for both bills. But at that point the Democrats would have to supply virtually all the votes for that.”

The other possibility is meeting perfectly in the middle on taxes. Obama wants to raise the top marginal rate from 35 percent to 39.6 percent on incomes above $388,000. That increase would generate about $1 trillion over the next decade for deficit reduction, in addition to another $600 billion produced by restricting deductions for the wealthy. The GOP counteroffer entertains but does not spell out limiting deductions to generate $800 billion, a sum the administration says is politically impossible to do.

But the White House—while demanding the rate increase—has not insisted when questioned by reporters that the top rate be a hard 39.6 percent. They could in, theory, halve their rate hike so it generated $500 billion instead, which along with the rest of their deduction caps be a $1.1 trillion increase. That figure isn’t perfectly in the center of things, but the math checks out.

The problem is that Democrats want to see Republicans making the shift toward them first.

Rep. Eliot L. Engel, D-N.Y., a prominent liberal, said in an interview that the Democrats have no intention of showing their hand on entitlement savings until Boehner and the Republicans “get real” and “put revenues on the table.” Until the Republicans show their hand on the question of raising rates on the wealthiest and getting closer to the revenue demands of the president, “we don’t want to negotiate against ourselves” by publicly discussing how far they would go to slow the growth of Medicare and other entitlement programs.

The GOP needs to see some major Democratic concessions on spending, since programs like Medicare wreak budgetary havoc starting in 2023—outside of the timeframe being negotiated—due to baby boomer retirements. Boehner and Senate Minority Leader Mitch McConnell, R-Ky., require a commitment to major reforms, such as raising the age to qualify for Medicare from 65 to 67, as a perquisite for an overall deal. And for every dollar that the borrowing limit is raised, Boehner requires a dollar reduced from long-term expenditures, which the president says is out of the question.

“There is no long term answer here to what is a very serious problem without addressing the spending side –and in particular the entitlement side,” said Walker, the former GOP congressman.

The Republican counteroffer on the fiscal cliff—cribbed in part from a potential deal outlined a year ago by Democrat Erskine Bowles—asks for $600 billion in health care savings over 10 years, about $250 billion more than what was contained in Obama’s 2013 budget proposal.

Meeting halfway means savings somewhere around the $475 billion. When combined with the higher taxes along with reductions from last year’s Budget Control Act and the end of the Iraq and Afghanistan wars, that brings the deficit reduction to $3.88 trillion.

In some ways, it’s easier to make the math work than the politics. Forging an agreement like this not only depends on both parties backing down from ideological stances, but also on negotiators moving much more swiftly.

“If there’s a deal it’s going to have to be a legitimate deal, the president is going to have to come a long ways towards where the House Republicans are,” said J.D. Foster, an economist with the conservative Heritage Foundation. “We’re simply running out of time. The clock is not Dec. 31st. The clock is most certainly something in the order of Dec. 22. Because then they’re going to leave.”