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A Real Deal



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Reading the papers this morning, one would think that the debt-ceiling talks have gone from contemplating a broad bipartisan compromise to settling for a narrow and mostly lost opportunity. It seems Republican intransigence on taxes has cost us all a shot at huge “grand bargain” budget deal.

 

But is that what has happened? Looking at the details of the big and small deals (to the extent that the reports of those details are accurate of course), suggests to me a rather different turn of events over the past week. President Obama offered Speaker Boehner the president’s own budget outline and called it a compromise. Republicans were asked to stomach not only a huge tax increase but also the Democratic approach to health-care and entitlement reform in return for President Obama’s approach to cutting spending. Democrats were asked to stomach only what President Obama already proposed in his own name earlier this year. This was basically a compromise between the Obama and Pelosi approaches to budget policy, not the Obama and Boehner approaches. The Speaker has instead opted to seek middle ground between the Republicans’ budget outline and the president’s. If nothing else, that certainly sounds more like an actual compromise.

 

Through their 2012 budget, congressional Republicans made clear earlier this year their approach to reducing short-term deficits and long-term debt. They would reduce discretionary spending by about $6 trillion over the next decade, bringing domestic discretionary spending below 2008 levels. They would reform Medicaid to reduce the incentives for inefficiency and over-spending inherent in the program by transforming it into a federal block grant and giving the states more power over its implementation. They would reform Medicare (albeit beyond the 10-year window) to reduce that program’s powerful incentives for inefficiency and overspending by transforming it into a premium-support system that used market forces to provide guaranteed coverage at lower cost. They would repeal Obamacare, to at least avoid further exacerbating our exploding health-care costs and doubling down on the broken model of today’s Medicare system. They would avert the nearly $2 trillion in tax increases resulting from Obamacare, from the expiration of the Bush tax cuts, and from the president’s budget and would instead pursue a tax reform that eliminated preferences and loopholes and then significantly lowered tax rates—so that the greater efficiency of a reformed tax code was put to use invigorating the private economy rather than further fattening up the federal government. 

 

This approach consists of pursuing some reforms that Republicans take to be constructive (like reducing discretionary spending, achieving a more efficient tax code with lower rates, and moving toward a defined-contribution system of health-care entitlements) and avoiding some that they take to be counter-productive (like reinforcing the fee-for-service model of health-care entitlements, increasing the tax burden on a struggling economy, and putting the government in command of the health sector).

 

The Democrats have not been quite as clear about their own approach, especially since the president proposed a budget in February and then gave a speech in April that outlined a very different budget but did not offer specifics. But if you take the two together (with the April speech superseding the February budget in those areas where they overlap), you’d end up with a rough picture of how they would approach things. They would reduce discretionary spending by about $1.5 trillion in 12 years—relying on caps, triggers, and steep defense cuts. They would pledge to reduce payment rates in Medicare (although existing reductions like these have been overridden by Congress each year for a decade) but not reform the structure of the program, saving another $400 billion. They would similarly cut rates in Medicaid and simplify the matching-funds rate to the states but not reform the structure of the program, for another $100 billion. They would save another $300 billion or so from “other mandatory spending,” though without much detail as to how. And they would increase taxes by about $1.5 trillion (including Obamacare’s taxes, the expiration of the Bush tax cuts, and the elimination of some loopholes—the revenue from which would be mostly used to fund federal spending rather than reduce tax rates).

 

This, again, involves pursuing some reforms the Democrats take to be constructive (like reducing some of the growth in discretionary spending, raising taxes to obtain new revenue, reducing payment rates in Medicare, and implementing Obamacare) and averting some changes they take to be counterproductive (like reforming Medicare into a premium-support system and Medicaid into a block grant, reducing tax rates amid high deficits, and making far more steep cuts in spending.) This description, of course, gives a little too much credit to the Democrats—they have not made proposals nearly as detailed and specific as those the Republicans have made. But if we take the general outline of what they have had to say and describe it as though it were a real budget proposal, I think it’s fair to say that’s more or less what it would look like.

 

Now, think about how these two approaches relate to what we’re hearing about the debt-ceiling talks. Simply put, President Obama has offered what amounts to his own budget proposal from earlier this year (as amended by his April speech) and called it a big bipartisan deal. But what is bipartisan about it? What it is in the “big” deal outline that was in the Republican budget but not in Obama’s budget? Nothing.

 

In effect, Republicans are being asked to accept several of the policies their budget took to be counterproductive (like reinforcing the fee-for-service model of health-care entitlements and increasing the tax burden on a struggling economy), to abide the implementation of Obamacare (which would be taken for granted and untouched in what purports to be a major long-term budget deal), and to settle for the Democratic version of tax reform and discretionary cuts. The Democrats, meanwhile, are being asked to settle for Obama’s budget and would be made to accept none of what they take to be counterproductive Republican proposals. Sounds like a great bi-partisan deal, doesn’t it?

 

A much more logical deal would involve each of the parties getting those among its proposals that are also among the other party’s, and not being made to accept or implicitly sanction policies it takes to be significantly counterproductive or harmful except in return for ones that the other party would otherwise veto. That’s what compromise generally involves. In this instance, that would mean some significant reductions in domestic discretionary spending (at least as large as Obama’s, but not as large as Ryan’s), maybe some in defense spending (though maybe not, it depends on how strongly the Republicans feel about limiting those), and maybe some deficit-neutral tax reform (though maybe not, it depends on whether the Democrats see value in eliminating loopholes for the sake of efficiency, as the Republicans do, or whether they would rather save that for a time when they can get revenue out of such a reform). A deal like that (even without the “maybe” elements) could easily approach $2 trillion in deficit and debt reduction, which should be enough to do both what Boehner wants (achieve cuts with a dollar for dollar relationship between cuts and a debt-ceiling increase) and what Obama wants (get him to the next election with some spending cuts to point to and without another debt-ceiling fight).

 

There are ways to pursue a more ambitious deal through give and take, of course—if each party accepted one of the other’s priorities in return for one of its own. For instance, a real step toward a premium-support Medicare reform along the lines of the Ryan budget might be worth a tax reform that involved some increased revenue and not just lower rates. But that is not the kind of give and take the president has proposed—he has made clear he would reject such entitlement reform. Instead, he proposes that Republicans accept his own budget blueprint and call it a big bipartisan deal.

 

That would be a very bad deal indeed. Much better to adopt the areas of overlap and call it a medium-sized bipartisan deal. That would still be an extraordinary substantive achievement for all involved, and an actual model of compromise in a time of divided government. And that seems to be where the talks are now headed, which is certainly an improvement over where they seemed to be going a few days ago.

 

The political press seems inclined to describe that change of direction as a lost opportunity for a big compromise, resulting from Republican intransigence on taxes. But in fact, it is a gained opportunity for a real compromise. Let’s hope both sides make the most of the opportunity.



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