I noted the emerging fiscal slope deal yesterday, and we have additional developments on that front.
The headlines here is that the Obama Administration narrowed the demand they maintained for four years, for tax rates to increase above $250,000, and they would agree to a benefit cut for Social Security and $400 billion in unspecified Medicare cuts, and in exchange they would mostly extend current law on a few fronts (but not all) and get an unspecified amount, no more than $50 billion, in infrastructure spending.
Also we’d all be back here in two years with a third debt limit showdown in 2014.
The New York Times has probably the best pure rundown of what the President offered. Let’s bullet-point:
• Taxes. “The White House plan would permanently extend Bush-era tax cuts on household incomes below $400,000, meaning that only the top tax bracket, 35 percent, would increase to 39.6 percent. The current cutoff between the top rate and the next highest rate, 33 percent, is $388,350.” This would raise somewhat less than the $800 billion envisioned by allowing the top two tax rates to rise. However, the White House’s revenue offer stands at $1.2 trillion, above that $800 billion number. Where’s the rest coming from? According to Jared Bernstein, the top capital gains and dividend tax rates would rise to 20% above $250,000 in income, and there would be some deduction cap, similar to the 28% rate on deductions above $250,000 that Obama has put in nearly every one of his budgets. But the details there are unclear.
• Spending. “The White House says the president’s plan would cut spending by $1.22 trillion over 10 years, compared with $1.2 trillion in cuts from the Republicans’ initial offer. Of that, $800 billion is cuts to programs, and $122 billion comes from adopting a new measure of inflation that slows the growth of government benefits, especially Social Security. The White House is also counting on $290 billion in savings from lower interest costs on a reduced national debt … Of the $800 billion in straight cuts, the president said half would come from federal health care programs; $200 billion from other so-called mandatory programs, like farm price supports, not subject to Congress’s annual spending bills; $100 billion from military spending; and $100 billion from domestic programs under Congress’s annual discretion.”
So you have chained CPI, a benefit cut to Social Security in a time when the program is not adequate enough to prevent 15.1% of all seniors from falling into poverty (I’ll cover this more in a subsequent post). Then you ADD TO THAT $400 billion in health care program cuts. The President’s previous offer has $400 billion in health care savings that did not affect beneficiaries, but these cuts are unspecified. On top of that, this only prevents 80% of the sequester from taking effect. If $100 billion in cuts to discretionary spending and $100 billion to defense remain, that’s 20% of the current sequester. And there’s $200 billion extra in mandatory cuts.
We don’t know how that plays out in terms of back-loading, but it approaches a $100 billion cut, if not more, in 2013. And you can add to that:
• Expiring programs. “And Mr. Obama is sticking by his request for additional upfront spending on infrastructure and an extension of expiring unemployment benefits … He would also secure some tax and policy changes long sought by both parties but unattainable in the context of smaller budget deals. His proposal would permanently extend popular business tax breaks like the credit for corporate research and development, permanently stop the expansion of the alternative minimum tax so it does not affect more of the middle class, and stop a long-planned and deep cut to Medicare health providers, which Congress has never had the stomach to allow to kick in.” What’s missing there is the payroll tax cut, which will almost certainly be allowed to expire. That’s another $125 billion in austerity for 2013, for a total of $225 billion in spending cuts and as much as $100 billion in taxes. The fiscal slope contemplated $500-$600 billion in fiscal snap-back in 2013; this deal appears to include HALF OF THAT FISCAL CUTBACK.
But wait! There’s the stimulus mentioned in the previous piece. Upfront spending on infrastructure, along with an extension of expiring unemployment benefits. Unemployment benefits are no more than $30 billion now, since they’ve been whittled from 99 to 73 weeks at most (it’s rather shocking to consider unemployment benefits “stimulus,” rather than what you do when there’s high unemployment). The infrastructure spending is undefined, but maybe you get $50 billion out of it, tops. I seriously doubt it, since that was the Administration’s initial offer. So maybe you get $80 billion (probably more like $60 billion) in stimulus to offset as much as $325 billion in austerity. That’s not going to do the job.
Then there’s the…
• Process. “To make all this happen, Mr. Obama proposed fast-track procedures to help Congressional tax writers overhaul the individual and corporate tax code and make changes to other programs.” In other words, Congress would have to run with the details here, including filling in the targeted spending cuts, and complete individual and corporate tax reform. Have you seen Congress work lately? Think they’re up to this task? No? Then you’re probably wondering how this deficit reduction will get secured. Wonder no more! You’ll have ANOTHER SEQUESTER, something that would automatically kick in if Congress failed to get a deal in a prescribed time.
One final thing:
• Debt limit: “To keep the country from returning to fiscal showdowns, Mr. Obama wants the government’s borrowing limit to rise high enough to take the issue off the table for two years, although he said that Congress could periodically weigh in and try to override a presidential lifting of the debt ceiling, should it want to.” That doesn’t come close to a permanent solution to debt limit weaponization. Under this deal, the deficit would close in 2013 and 2014, so you’re talking about probably a $1.6 trillion debt limit increase, or something in that neighborhood. And in two years, the gang gets back together – at least everyone left in Congress – to do this all over again. Nobody expects Democrats to carry the House and 60 votes in the Senate, so Republicans can work their leverage again.
From where I’m standing, this is a deal for the President to break his promise on tax rates, allow half of the fiscal slope to go forward, probably cut as much as 2% from GDP in 2013, and enact permanent benefit cuts to Social Security (and other government benefits) as well as unspecified cuts to health care programs, in exchange for…
- a routine extension of unemployment insurance;
- no more than $50 billion in infrastructure, probably less;
- a permanent extension of things Congress does annually like clockwork (making them permanent is good public policy, but doesn’t functionally change much);
- the chance to do this again in two years.
Meanwhile, Republicans give up tax rates that were going up anyway, an unemployment extension that they have yet to fail to pass, and a bit of infrastructure. That’s it, in exchange for cuts that will put discretionary spending well below traditional levels, cut Social Security benefits and basically ensure smaller government through caps and cuts.