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December 10, 2012

Strategic Plotting for the Fiscal Slope: How Democrats Could Find Their Way Out of the Box

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I think Brian Beutler has a pretty good summation of why we’re talking about social insurance cuts when the White House appears to have leverage:

…in three weeks, tax rates will go up for everybody with or without any concessions from the White House [...]

That’s the single most important fact to know about the ongoing negotiations between Obama and Boehner to avert large tax increases and spending cuts at the beginning of 2013.

But the White House has requests of its own. It wants to extend stimulative policies like emergency unemployment benefits and the payroll tax cuts. It wants to (at the very least) delay the defense and domestic spending sequesters. And above all, it wants to raise the debt ceiling without a replay of the 2011 brinksmanship that damaged the economy, which is still suffering in the aftermath of the 2008 financial crisis.

This is why people like Bob Corker have laid out the “negotiation swap” strategy for Republicans: give in on tax rates, and then hold the upper hand, with spending cuts kicking in, the debt limit about to expire and the White House wanting stimulus.

This is especially true because, as the IMF recently pointed out, spending cuts hurt economies far more than tax increases. So the substantive political victory on taxes could be banked by the White House, but the reality is that the sequester and unemployment benefits matter much more to the underlying economy.

One possible way around this is that Republicans really don’t want to see the defense side of the sequester invoked. Therefore, Democrats would retain leverage on averting the cuts to defense contractors, and they could “give that back” in exchange for something they want, rather than having to move into the pot of Social Security and Medicare. The Pentagon has begun its initial planning for these cuts, which total $492 billion over ten years. However, the Defense Secretary and the President have already characterized these cuts as catastrophic, so the leverage there appears to be blunted.

Similarly, the President could fall back on the $1.5 trillion in cuts already enacted as a result of the spending cap, arguing that the baseline already calls for reductions in spending, so nothing further can be allowed. But since that has already been passed, it’s a bit of a hollow argument.

The White House has already said that they would not invoke the 14th Amendment argument on the debt limit. So a strategy of getting the tax deal in place and just staring down Republicans, with the Constitution as the spur, on the debt limit has less resonance. In that event, the only item left would be the sequester, which nobody wants, so an accommodation would be easier. But the debt limit leverage acts as a forcing event.

It could be that the President, burned by the debt limit showdown once, and mindful not to keep that debt limit vote weaponized for future Presidents, threatening default whenever convenient, will engage in a massive response to an attempt to take that hostage, shutting down large parts of the government and daring Republicans to remain obstinate. But we just haven’t seen that kind of willingness from the President to date.

If he does go that route, the debt limit becomes a different conversation, and you have the tax issue (where Democrats have leverage), the sequester (where nobody wants it to happen) and the stimulus measures (where Republicans can effectively veto) left. That could probably get fought to a draw, probably not getting stimulus but with higher tax rates on the rich and a deferral of some sort of the spending cuts. The key lies in defusing the debt limit time bomb. That should be at the heart of the Administration’s strategy right now.

Obviously all of this is predicated on whether the White House really wants to stop a “grand bargain,” which doesn’t match their actions of the past couple years. But for those who suggest that “concessions” must be made, it should be noted that the way out of that box is entirely about the debt limit.


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