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One Cheer for the Deal



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The full text of the proposed debt-ceiling deal is online here and the CBO score of the bill can be found here. Most of this (very long, forgive me) post is a fairly detailed description of the particulars of the bill, in case you’d find those useful. I’ll put that below the jump, in case you wouldn’t find it useful, but first here are a few overall impressions.
 
The bill became substantially worse in this latest version, and not for the reason I imagined it would. When Speaker Boehner’s bill was held up in the House on Thursday, I thought that might prevent its language regarding the first stage of caps from becoming the language of the ultimate deal and thus allow the Reid bill’s language (which was significantly worse on defense and weaker overall) to serve as the template. That didn’t happen here. The first tranche of caps is basically Boehner’s, and it’s an unmitigated good. Meaningful statutory caps on discretionary spending that would yield modest but real savings of $917 billion in return for a $900 billion increase in the debt limit, with real protection for defense. (The White House today put out a fact sheet that claimed defense would be cut by $350 billion in ten years under this first stage, but after repeatedly scouring the bill and talking to several people involved in its drafting I have come to conclude that that’s simply false. There is no such language in the bill.)
 
What follows that first stage, however, is now more problematic. There are all manner of options and steps meant to entertain and distract (which I’ll detail below), but I think they are mostly designed to go nowhere and the bottom line is that what follows is a further lowering of the caps to yield another $1.2 trillion in cuts, but those additional cuts are divided more or less evenly between defense spending and all other spending. Roughly speaking, and the math would be a little more complex than this, that means more than $500 billion in defense cuts over 9 years starting in 2013 (because unlike the first-stage caps, these wouldn’t apply to fiscal year 2012), along with more than $500 billion in non-defense cuts (drawn mostly from the same discretionary programs as the first stage, plus a very small amount from Medicare). That strikes me as far too steep a cut in the first and foremost function of government, both in relation to cuts elsewhere (non-defense discretionary spending has grown at two-and-a-half times the rate that defense spending has in the Obama years) and in relation to the importance of defense.
 
These defense cuts are a serious mark against the overall deal. But in the final analysis, I think the deal is substantively worthwhile: It’s a step forward on spending that makes further steps more likely, it doesn’t increase taxes and makes it difficult for them go up later, it doesn’t backslide on entitlement reform and (I think) makes such reform a little more likely to happen. It will make liberalism as it has been practiced in recent decades more difficult to sustain and expand. It is a sign of how completely the Democrats have ceded the agenda to the minority party in Washington, and of how very little liberalism has to offer this moment of great consequence and grave decisions.
 
I think it’s fair to say that this bill is a much (much, much) larger defeat for the left than it is a victory for the right. Other than defense cuts—if they like that sort of thing—there’s basically nothing here for liberals to like and a great deal for them to dislike very much. It is hard to see why any liberal would support this. The idea that we would be enacting real statutory caps on discretionary spending without tax increases, and that President Obama would basically welcome them, would have struck your average liberal policy wonk as utterly unbelievable and horrible just a year ago. But it has been a rough year for the left, a year of drift and surrender, and it seems like Democrats may well take what they’re given here.
 
But as I say, this huge defeat for the left is only a modest win for the right. The bill wouldn’t drastically reduce our long-term debt problem, and the ratio of defense and non-defense cuts will need to be significantly changed at the earliest opportunity. But on balance—as such things always must be weighed—this is a very good and worthwhile bill. We can’t get very far while Barack Obama is president, but this bill gets further than I would have thought possible.
 
Beyond that, there are only lots of details, and if those interest you, read on below.
 
#more#

The First Stage
The bill increases the debt ceiling in two stages. The first stage involves a $900 billion increase in return for what CBO scores as $917 billion in discretionary spending cuts over the next ten years. This is by now the most familiar step, and the legislative language and spending levels here come largely from the Boehner bill. The cuts are achieved by statutory spending caps—of the sort that proved quite resilient and effective in the 1990s (and had a lot to do with the achievement of a balanced budget in that decade). Those caps would set an overall limit on discretionary spending in each of the next ten years. Each year, the budget committee in each house would decide how to allocate that year’s amount among the different appropriating committees, and then the appropriators would decide exactly where the cuts would happen and what the spending levels for individual programs would be—keeping to the overall level of spending assigned to them. If they failed to do so, then the entire discretionary budget would be subject to an automatic across-the-board cut (a “sequester”) in the amount required to get spending down below the cap, divided equally among all the line items in the budget subject to the cap and applied equally to all of them.
 
In the first two years, the caps in this stage specifically protect defense spending from steep cuts by defining a broad category called “security” spending—which includes the defense budget as well as homeland security, veterans’ affairs, the intelligence budget, and the international affairs budget (the State Department and USAID)—and establishing a spending cap for that category and a separate spending cap for all other spending in fiscal years 2012 and 2013. After those first two years, the bill defines only an overall spending cap in this stage, to be allocated between security and non-security as the budget committees decide. That’s a reasonably good protection for defense in the first stage, which means basically for FY 2012. For 2013 (and beyond), some changes in the second stage would be a problem, as we’ll see below. But again, the notion that this first stage cuts defense by $350 billion seems to me to be incorrect—perhaps based on language from an earlier Senate version of the bill that was (I am told) removed at the last minute.
 
Two other things to note about this first stage. First, the debt limit increase in this first round, like the second, is subject to what has come to be known as the McConnell option—the president’s formal request for a debt-ceiling increase is subject to a congressional resolution of disapproval, which the president would have to veto in order to get his debt ceiling increase. Congress could then override that veto (which requires a two-thirds vote in both houses) and deny the president the increase. That override won’t happen, but in effect even after enacting this deal, the vast majority of members of Congress could still then vote against raising the debt limit, and the president and a third or so of the Congress would have to push through the increase. This provision, especially its inclusion in the first tranche of debt-limit increase, is frankly just a big middle finger to the president by both parties in congress.
 
And second, the bill allows the Senate (but not the House) to count the spending caps in the first stage as the equivalent of a budget resolution for 2012 and for 2013. So basically, Senate Democrats don’t actually have to pass a budget before the election (they have failed to pass one since before the last election, and they don’t want to pass one so they don’t have to come down for any particular fiscal policy that might be unpopular with voters). This is again an indication of how focused the Democrats are on politics in this whole process, while they surrender over and over on policy.
 
Overall, the first stage of debt-ceiling increase is all good news for Republicans. It’s a budget process reform for the next ten years, and I think the power of process changes should not be underestimated. Obviously, the 2012 election is the real referendum on the country’s fiscal future, and everything could be revised after the election. But statutory spending caps would have to be actively removed, and even if the election does not go well for Republicans that would not be an easy thing to do. The 10-year caps enacted in 1991 lasted all the way through 2001, through presidents and congresses of both parties, and while there was some gaming of the system in the later Clinton years, those caps were pretty effective. Putting this mechanism in place now likely gives conservative budgeteers a powerful tool for the next decade, and gives liberal budgeteers a long-term headache. These caps (together with parts of the second stage) will make it very difficult for liberals to do what they do—very difficult for any fiscal stimulus to be enacted, very difficult for new discretionary programs to be created, very difficult for existing ones to grow much. This part of the deal basically takes discretionary spending off the table for a while and leaves entitlement reform and taxes for policymakers trying to fix our fiscal problems in the coming years. I think the Democrats will find that tax increases of the sort that would be required would be far less popular than they imagine, and entitlement reforms would be somewhat more popular than they imagine. Medicare reform, in particular, is the essential reform, and this deal makes it more likely rather than less.
 
The Second Stage
Once the government has gone through its additional $900 billion borrowing authority (probably around the end of the year), the president can request an additional increase of $1.2 trillion in the debt ceiling. The bill would basically guarantee that he would get that increase (provided, again, there is not a two-thirds majority to override his veto of a resolution of disapproval). If the congress has approved and sent to the states a balanced budget amendment, he would get the increase and nothing else would be required. If the new super-committee of the congress has agreed on more than $1.2 trillion in cuts and those cuts have been enacted into law, he would get the increase. If neither of those things has happened, then he would get the increase but the spending caps created in stage one would be further tightened to yield enough savings to reduce the deficit by an additional $1.2 trillion over ten years.
 
A quick word on each option. The bill requires both houses of congress to hold votes on a balanced budget amendment sometime between September 30 and December 31 of this year. If both houses pass it with the necessary supermajorities and it is sent to the states, then the president will receive his second tranche of debt-ceiling increase. Meanwhile, the super committee (which the bill calls “a joint select committee”) would consist of 12 members (3 each from the House and Senate Republicans and Democrats), appointed in the next two weeks, and would have to produce a report by November 23 showing how to reduce the deficit by at least $1.2 trillion with specific legislative language scored by CBO. Only items that receive the votes of a majority of the committee’s members would be in the report. Both houses will vote on the recommended legislation by Christmas, and without amendments.
 
Simply put, this committee is going to fail. Its membership—no doubt carefully selected by the four congressional leaders—will almost certainly guarantee that no tax cuts and no major entitlement reforms are proposed, and it would be very hard to reach the savings it would need otherwise with bipartisan approval. The committee would also be required to work from the CBO’s current-law baseline (which assumes the Bush tax will expire in 2013), meaning that it would need to raise more than $2.3 trillion in taxes just to get to a point where tax increases (or rather, increases in the personal income tax) even lower the deficit at all. That’s a much higher tax increase than even the Democrats have proposed, and much higher than they would want to champion in an election year. Corporate increases or the creation of new taxes could reduce the deficit, but the politics of a meaningful increase on either front are pretty rough—even for Democrats. The far easier route for both sides, especially given the likely membership of the committee, would be to ignore the tax side of the equation in the committee (leaving it to be settled in congress next year) and focus on spending reductions to reach the $1.2 trillion goal. Republicans could fairly easily show how to do that: there are multiple routes in the Ryan budget, most notably through Medicaid reform (that would both improve the program and save about $800 billion in a decade) combined with some additional discretionary cuts. But Democrats would not support those approaches, and it therefore seems very unlikely that the committee will find a majority for any proposal that gets anywhere near its target. It would either make some smaller cuts or none.
 
Now, smaller cuts would matter. Any cuts that the committee recommends and that end up being enacted would reduce the amount that has to be cut using the automatic caps described below. It would be worth it for both Republicans and Democrats to make some cuts, therefore, because that would reduce the need for both more defense cuts and more non-defense cuts. The impetus will be greater for Republicans, since the committee could pursue non-defense cuts that would reduce the need for later defense cuts. The Democrats certainly hope that this dynamic will drive Republicans to support tax increases in the committee (indeed, the entire logic of the last-minute Democratic changes to the debt-ceiling deal is to force Republicans to choose between tax increases and defense cuts, whether this year or when the Bush tax cuts expire in 2013). Such tax increases are exceedingly unlikely, however, and the committee is more generally very unlikely to agree on much.
 
And that would leave us with the final backstop. If a balanced budget amendment is not sent to the states, and the super-committee does not agree on $1.2 trillion in cuts (or its cuts are not approved by both houses), then the spending caps from the first stage of the process would be further lowered starting in FY 2013 to achieve additional savings of $1.2 trillion over nine years. This would be done by a process that first replaces those original caps with a new set of caps that achieve the same level of savings as the first round but are divided (roughly in the same proportion as the division in this year’s budget) between security spending (which includes defense, homeland security, and foreign operations) and non-security spending (everything else). Then OMB would figure out how much money would be needed to bring spending down by $1.2 trillion over ten years (basically it’s $1.2 trillion minus whatever the super committee got enacted minus debt service of 18%), and would divide that figure by 9, so that it’s evenly divided between fiscal years 2013-2021. (Note that this means these cuts are NOT weighted toward the out-years). That amount in each year would then be divided in half between defense (not the broader security category, but straight-out defense spending) and the rest. So basically, half the additional cut each year would come from defense. In the non-defense category, most anti-poverty programs and Social Security would be exempt, and the cut from Medicare would be limited to 2% of the program’s spending each year (so about $10 billion next year).
 
The details of this backstop process are important because I think it is very likely that this process would in fact take effect, at least in FY 2013. It’s easy to say, as many are saying today, that after the election we’ll have some new array of forces in Washington (regardless of who wins) and this will all be renegotiated, but I’m not so sure about that. Spending caps are not easy to remove—the politics of undoing them proved troublesome for both parties in the 90s. And even if there are further spending reforms (like entitlement or tax reforms, some of which seem likely since this deal will by no means address our actual debt problem), they are likely to come on top of these spending caps, not in place of them—or at least not in place of all of them. Some of the details of the caps can be changed more easily, of course, and surely will be. The Democrats may force adjustments in some of the discretionary levels, and Republicans may well improve the treatment of the defense budget in this mechanism. I think that’s likely, but even as the details change a bit this bill will mean that the federal budget process works under spending caps for the next 10 years, and everything else that happens must happen within more or less these bounds.
 
That means that the politics of discretionary spending for the next decade will be the politics of spending cuts, and that is on the whole a good thing for conservatives.
 
One more point worth noting about this second stage: If there is no balanced budget amendment and the committee does not produce savings above $1.2 trillion, the backstop process could only allow for a debt-ceiling increase of $1.2 trillion, not more. That means the total increase (including the first stage) would be $2.1 trillion. The administration seems to believe that would get us through the election, but that depends on a fairly strong economy with fairly strong tax revenues, which we do not have right now. I think there is a very real chance that they are overestimating tax receipts, and that this arrangement will actually create another debt-ceiling moment late next year—awfully close to the election.
 
Beyond This Fight
On the whole, I think this deal is a good outcome for conservatives, given the options they had and the leverage they had. It cuts spending without raising taxes, and it helps keep the Washington conversation focused on spending restraint without closing off the avenues that will be essential to the conservative case for economic growth, jobs, and prosperity in the coming months.
 
I also think that on the whole it makes meaningful entitlement reform a bit more likely. This bill, unlike the “grand bargain,” would not pretend to involve some serious Medicare reform while actually just doubling down on price controls. It would not implicitly accept Obamacare. It would reduce spending in return for a debt-limit increase, getting us past one crisis point but leaving in place a fairly broad agreement that the impending explosion of debt is a huge problem. The simple fact is that health-entitlement reform is the only way to really get at that problem—a fact which is fairly easy for Republicans to explain in the coming year, even if the case for their proposed reforms of course remains a challenge. That doesn’t mean the politics of entitlement reform have gotten easier, but it means that we have taken another step toward planting the premise that we must take our debt problem seriously while denying the Democrats an opportunity to demagogue the Republican approach to Medicare reform. I think that on the whole this deal makes it more likely, rather than less, that the next Republican presidential nominee will offer some meaningful Medicare reforms, which is a very good thing.
 
The major drawback, as noted above, is what it does to the defense budget. Congressional Republicans should commit to redressing that at the earliest possible opportunity, and every Republican presidential nominee should commit to do the same if elected. There is some time before serious defense cuts would take effect, and that time should be used to avert them.
 
No deal is perfect, and this deal is very imperfect, but there is certainly more good in it than bad. For a conservative, that’s about as good as things ever get in this messy world.


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