The Washington Post has a first draft of history piece about the debt negotiations last year that tells us mostly what we already knew: that the White House was ready to sign onto a document that increased the Medicare eligibility age and instituted chained CPI, which would cut Social Security cost-of-living increases. In exchange would be $800 billion in new taxes, roughly the cost of letting most of the high-end Bush tax cuts expire (though this would be achieved by actually lowering rates and broadening the tax base).
Harry Reid and Nancy Pelosi reluctantly agreed to try and sell this. Republicans would only do it if they could count “dynamic scoring,” the notion that tax cuts pay for themselves in economic growth, in the deal. Republicans say the White House accepted that. The White House denies it.
Then the Gang of Six came out with their deal in the Senate, which included much higher tax increases than what the Administration was about to sign off on. This blew up the deal when Obama seemed to endorse the Gang of Six process (which included more tax increases), Republicans immediately backed away from it; after the White House tweaked their deficit deal with House Republicans to catch up with the Gang, the Republicans summarily rejected it.
The deal could have easily become a reality were it not for the troublesome appearance of the Gang of Six. And it could still become a reality. It says right there in black and white at the end of the article: “White House officials said this week that the offer is still on the table.” What’s more, despite the change in attitude from the President, who’s in election mode, from a conciliator to a fighter, there’s a signifying event coming at the end of the year that will force a number of these same choices to be negotiated again.
By January 1, 2013, the Bush tax cuts will expire, the payroll tax cut will expire, unemployment benefits will expire, the “doc fix” on Medicare reimbursement rates will expire, and the “trigger” of $1.2 trillion in across the board defense and discretionary spending cuts will be triggered. Taken together, this mass of deficit-reducing changes would wipe out the primary budget deficit, leaving mostly a deficit made up of financing for the national debt. Debt-to-GDP ratio will fall, the key number often cited for sustainability. Oh, and the debt limit will run out around this time as well, making it more of a forcing event.
But we’re already seeing economists line up, on the right and left, to say that this shock of immediate changes would be unacceptable. Republican Martin Feldstein said that the changes would threaten economic recovery. Democratic economist Alan Blinder described the event as a “fiscal cliff,” which would eat away at up to 3.5% of GDP.
I agree with this to a certain extent. Clearly the combination of massive spending cuts and tax increases coming all at once would put a drag on the economy at a sensitive time. But I will note that Brad DeLong heh-indeeded Feldstein’s take on not being able to “afford” the end of the Bush tax cuts, while also linking within 24 hours to Christina Romer’s point that increasing marginal tax rates would not cause an economic armageddon. In other words, there’s a way to manage all this without saying that we “must not” increase those tax rates.
But sadly, that’s where the groundwork of the grand bargain talks comes in. Democrats and Republicans in Washington are going to look for a substitute deficit package in the lame duck session, the point of the lowest ebb of political accountability, with members of Congress who will never face voters again participating, after America has elected a new Congress and possibly a new President. We know that deficit hawks of both parties are already making their plans on this substitute. It could include slashes to entitlement programs when they actually need to be increased to be adequate. It could include a raft of tax cuts even though they have done the brunt of the work on exploding the deficit, without the value of helping the economy. And what it will most surely not include, unless the work gets done today, is the perspective of those ordinary Americans who would rather not see their futures sacrificed for the betterment of the well-off in society.
And remember, “White House officials said this week that the offer is still on the table.”