A third option changes the negotiation

A third option changes the negotiation

The conventional wisdom on the fiscal cliff is that there are two options: (1) an Obama-Boehner deal; or (2) no deal, in which case there is no legislation before the end of the year and we “go off the fiscal cliff.” Even those who acknowledge the possibility of other legislative paths appear to treat the Obama-Boehner negotiation as if it were the only alternative to a failure to legislate.

I won’t rehash my argument that the President is no more willing to risk a no deal scenario than Republicans, and therefore that he and his advisors are bluffing when they say they are willing to “go over the cliff” if a new bill is not to their liking. But after talking to Republican friends on Capitol Hill, I am confident that I have convinced no one of this point. It appears many key Republicans believe that a no-bill scenario is unacceptable and must be avoided at any cost.

If enough Republican Members of Congress believe this, and if the President knows they believe this, then Speaker Boehner has literally zero leverage in his negotiations. The President can dictate his terms because Republicans think he is willing to walk away from a bad deal and they are not.

At the same time many conservatives on and off Capitol Hill are talking about their policy views on what a possible Obama-Boehner deal should (or even “must”) include. I hear and read that marginal rates must not increase, or that we shouldn’t raise taxes by the $1.6 trillion the President demands, or that there must be a procedural path to enact tax reform, or that the defense sequester must be mitigated, or that a deal must include significant spending cuts and entitlement reforms. While I share these policy views, it seems absurd to be simultaneously making these demands of your negotiator while giving him no leverage.

If, however, there is a third option, one that is terrible but not inconceivable, then there is at least some minimum floor to the negotiations. If a third option exists, then Speaker Boehner and the Congressional Republicans he represents can reject demands from the President that are worse than that third alternative. Even a highly undesirable third legislative option changes the negotiating dynamic, if it is minimally tolerable in the extreme. If most Republicans would prefer that third option to a no-deal “go off the cliff” scenario, then the Speaker has at least a little leverage to reject or ignore outrageous demands from the President. He can say, “No thanks, Mr. President, we’ll just go with option C, whether you want us to or not.” The negotiating term for option C is a new and stronger BATNA: Best Alternative To a Negotiated Agreement. The risk of going over the fiscal cliff is irrelevant because Republicans have a backup plan if there is no deal with the President.

This doesn’t mean Republicans want to go with option C, or that they like option C. It instead means their negotiator now has the ability to walk away from a really terrible deal with the President, and that he can therefore demand a bit more from the President in exchange for cooperation on a deal. Option C is useful to Republicans even if their strong preference, for non-policy reasons, is to negotiate a deal with the President.

I think option C is S. 3412, a bill passed by the Senate in July. The short description is that this bill “extends the middle class tax relief for one year and allows tax cuts for the rich to expire.” More precisely, here is what the bill does (Joint Tax table is here):

  • It extends for one year all current income tax rates for incomes <$200K (single) and <$250K (married);
  • For one year it keeps the capital gains rate at 15% for the same incomes as above;
  • For one year it (explicitly) raises the capital gains and dividends rates to 20% for incomes >$200K/$250K;
  • It extends for one year other provisions of current law, important and not-so-important:  marriage penalty relief and the child credit, education tax relief, and a handful of smaller provisions; and
  • It patches the AMT for 2012.

There are corollary policy consequences to enacting S. 3412 as-is. Unlike the explicit capital gains and dividend rate increase on “the rich,” these consequences are implicit, meaning they would happen because S. 3412 didn’t prevent them from occurring.

  • Income tax rates on incomes >$200K/$250K would increase to 36% and 39.6%, their pre-2000 rates;
  • If no new legislation is enacted in 2013, we would again face the same kind of cliff at the end of tax year 2013 as we are facing now; and
  • The spending sequesters would still happen beginning in January 2013, since S. 3412 is silent on the sequester.

On July 25th S. 3412 passed the Senate on a 51-48 near party line vote, in which Senators Lieberman and Webb joined all Republicans in voting no. This Senate vote is critical to my argument. Senate Democrats have already passed this bill, so it is rhetorically infeasible for them to now say no to it. If there is no Obama-Boehner deal, the Speaker has the ability to bring this bill to the House floor and present it as a take-it-or-go-off-the-cliff offer to Congressional Democrats. Many (most?) House Republicans would oppose it, but enough of them would join with Democrats to pass the bill and avert the cliff scenario.

S. 3412 is a terrible, horrible, no good, very bad bill. I hate S. 3412 because it allows taxes to increase by $80ish B (that’s a guess) next year. I hate that it raises revenues by increasing marginal rates rather than through tax reform-induced economic growth and by eliminating or scaling back tax deductions. I hate that it raises taxes on successful small business owners. I hate that it raises capital gains and dividend taxes. I hate that it creates more uncertainty and another cliff at the end of 2013. I hate that it doesn’t contain any spending cuts or entitlement reforms.

In addition I hate this bill because I helped enact, design, and defend the tax rates on income, capital gains, and dividends now in effect, first as an aide to Senate Majority Leader Trent Lott, and then as an aide to President Bush.

I detest S. 3412 and do not want it to become law.  But I fear that Congressional Republicans are so afraid of being blamed for a no-bill scenario that they will agree to support a hypothetical Obama-Boehner deal that is even worse. They should not do that. They must not do that.

If you share my policy views but think the President is not bluffing, and if you think that America cannot, under any circumstances, risk a no-bill scenario, then S. 3412 is your Option C. It does exactly what President Obama has been calling on Congress to do, it allows tax rates to increase on the rich. It just doesn’t also do other things that we know he wants to do, but which he has not been making the centerpiece of his kick-Republicans-around PR campaign. S. 3412 does not raise taxes by $1.6 trillion, but instead by $80ish B (not counting the AMT patch). It does not guarantee the President $800B – $1T over the next decade, because it tees the fight up again a year from now when the political and legislative dynamics may be different. And it does not include the debt limit increase the President is demanding in end-of-year legislation, and which if enacted now would deny Republicans a tool to demand future spending cuts.

Even more importantly, S. 3412 has passed the Senate entirely with Democratic votes and is therefore a viable legislative alternative in an endgame take-it-or-leave-it scenario. Messrs. Boehner and McConnell could, later this month, announce, “Negotiations with the President have broken down because he refused to cut spending enough. We are therefore not going to stand in the way of S. 3412 becoming law. We oppose this bill and we will both vote no. We imagine most other Republicans will do the same. But it will be brought up for a House vote, and we expect enough House Republicans will join the Democrats in voting for this policy that we will avoid an end-of-year disaster. We will oppose President Obama’s tax increases, but we will not prevent them from becoming law because we do not want to risk a recession next year. The President will get his tax increases when Democrats [and a handful or two of House Republicans] vote for them now, and we will continue to press for spending cuts and tax reform in 2013.”

I hope this scenario does not occur, and I do not want to see S.3412 enacted into law, but having it as a viable legislative fallback helps the negotiating dynamic with the President. There is no reason why Republicans should feel pressured to accept any offer from President Obama that they deem to be worse than this bill, an $80ish B tax increase that extends for one year tax rates for only the “middle class.” Congressional Republicans have no need to fear the policy effects or political blame of the fiscal cliff because they have a less-worse alternative available.

Suppose, for instance, that in his private discussions with Speaker Boehner the President is characterizing himself as “coming down to $1.2 trillion” of higher taxes over the next decade (I’m guessing). S. 3412 contains a tax increase of less than one-tenth that size. Now it sets up between $800B and $1T of higher taxes over the next decade, if you guess that each subsequent year it would be extended again as-is. I hate temporary fiscal policy extensions almost as much as I hate S. 3412, but there is no reason why Congressional Republicans should feel obliged to support massive tax increases of more than this range in an Obama-Boehner deal.  The extended size of S. 3412 should be a ceiling for tax increases in an Obama-Boehner deal, not a floor.

It gets tricky when we try to compare Option C, S. 3412, with a hypothetical Obama-Boehner deal, both because we don’t know what might be in such a deal, and especially because it’s a multi-dimensional comparison. A deal could be better than S. 3412 in some areas and worse in others.  I will try to unpack those questions soon.

For now, however, it is important to understand that, even if you are unwilling to challenge President Obama’s bluff, Republicans have a third option, a legislative alternative to an Obama-Boehner deal.  And that gives them and their negotiator at least a little bit of leverage.

(photo credit: gfpeck)

Understanding the President’s fiscal cliff offer

Understanding the President’s fiscal cliff offer

I am going to describe the President’s proposal to Republican Congressional leaders, then react to the most important parts of it.  Secretary Geithner offered this proposal last Thursday.

This is a post for intermediate to advanced readers. Except where noted, all large numbers are for the next ten years.

President Obama’s opening bid

Items in bold are being labeled by the Administration as non-negotiable. Brackets show where I am unsure what they are proposing.

Arithmetic

This is how the Administration describes it.  I think this arithmetic is absurd and explain why below.

  • $4 trillion of deficit reduction relative to a current policy baseline;
    • $1 trillion comes from the discretionary spending caps enacted in the Budget Control Act of 2011;
    • $1 trillion comes from lowering the spending caps on Overseas Contingency Operations (aka Afghanistan and the remaining forces in Iraq);
    • $400 B comes from unspecified savings in mandatory spending; and
    • $1.6 T comes from tax increases.

Taxes

  • Raise top two income tax rates permanently;
  • Extend all other tax rates, credits, and related income tax provisions permanently;
  • Tax dividend income as ordinary income;
  • Estate tax: $3.6M exemption, 45% rate – These are the parameters that were in place in 2009.
  • Capital gains rate increases to 20%;
  • Extend the Payroll tax credit;
  • Extend bonus depreciation for business investment;
  • Permanently extend the Alternative Minimum Tax;
  • Permanently extend a package of routinely expiring tax provisions, mostly for businesses, known colloquially as tax extenders.

Debt limit

  • Increase the debt limit “permanently,” meaning further legislative action to raise in in the future would never[?] be needed again.

Spending

  • $50 B additional highway spending in 2013 above baseline, with five years after that of $25 B more per year (total of +$175 B over six years);
  • Permanently extend Medicare payments to doctors (aka the Sustainable Growth Rate, aka a permanent doc fix);
  • Extend Unemployment Insurance [for how long? a year?];
  • the Menendez/Boxer housing refinance bill;
  • Delay the entire 2013 sequester and find $109 B of unspecified savings to cover the deficit effect of the delay;
  • [Propose? Support?  Enact?] Tax reform in 2013 that increases taxes on the upper brackets by $600 B by capping deductions;
  • [Propose? Support? Enact?] Entitlement reforms in 2013 that cut spending by $290 B;
  • The 2014 sequester would [somehow] be used as an enforcement mechanism to drive tax reform and entitlement reform in 2013.

Analysis

Arithmetic

The President’s arithmetic is absurd.  The BCA cap reductions were enacted 16 months ago, but Team Obama wants to count that $1 trillion again as if it is future deficit reduction. The Afghanistan OCO caps are mythical savings—the President never proposed to spend those funds, but they want to count savings by not spending them.

The $1.6 trillion in tax increases would be real if enacted.  There are no budgetary or arithmetic games here, just policies I strongly oppose.

They specify no details on their $400 B in mandatory spending cuts. All entitlement programs, including the big four (Social Security, Medicare, Medicaid, and ObamaCare) are mandatory spending, as are farm subsidies, student loans, welfare payments, and a bunch of other things. But certain “offsetting receipts” also technically count as mandatory savings, even though to you and me they look much more like increased fees or asset sales (like auctioning off telecommunications spectrum). The $400 B figure is therefore, at best, a ceiling for gross spending cuts. And of course the President and Congressional Democrats keep reminding us that they won’t touch Social Security and really don’t want to cut Medicare, Medicaid, or ObamaCare.

Also, note that the President’s proposal would enact only $109 B of mandatory savings now. The other $290 B might come in 2013 as a result of entitlement reform.

I’m sure someone will ask what the total effects of the President’s proposal are on spending, taxes, and deficits. That’s a simple question with a really complex answer, and I’m not going to try to answer it today. If you’re a reporter and need to know, I’d go to Chairman Ryan’s and Chairman Sessions’ staff. Don’t try to calculate it yourself. I estimate below that the net effect of his spending proposals, however, is to increase rather than cut spending.

“Balance”

Team Obama makes a big deal about balancing spending cuts and tax increases.

They measure spending cuts starting from current all-time historically high spending levels, and they measure tax increases from revenue levels which are artificially low because of the weak economy. This skews even an honest measurement of spending cuts and tax increases in favor of those who prefer higher taxes. It also means that any calculation of a ratio between spending cuts and tax increases is fundamentally misleading.

If that weren’t bad enough, Team Obama continues to try to combine previously enacted spending cuts with proposed future tax increases, and to treat them as if they were part of a package of future policy changes. I don’t use this term lightly: this is a lie.  The President’s version of balance means “In 2011 we enacted a bunch of spending cuts, so now to balance it we’re going to rely almost entirely on tax increases.”

I expect Obama spokesman to claim they have more spending cuts than tax increases.  They’ll add the $2 trillion of past (BCA) and mythical (OCO) spending cuts to the $400 B of spending cuts, three-fourths of which they don’t want enacted in this bill, and say that the total is more than the $1.6 T of tax increases the President demands be enacted now.  That would be funny if it weren’t so dangerous.

I saved the best for last. The President is proposing spending increases, not spending cuts. He claims $400 B of spending cuts for policies he hasn’t specified, and $291 B of which wouldn’t be considered until next year. But he proposes to spend $109 B to delay the sequester for a year (GOP defense hawks will like this), and another $175 B on highways, and another $30ish B on unemployment insurance. Then he’s got the cost of Menendez-Boxer on housing (I don’t know), and the cost of a permanent Medicare doc fix (hundreds of billions, depending on the details). The net result of his proposal is higher spending, not lower.

Taxes

I’ll start with something positive.  Good for them for proposing a permanent AMT patch.

Note that they say “raise the top two income tax rates.”  They don’t say “raise them to pre-Bush rates, with a top rate at 39.6%.” Team Obama has been fairly clear in signaling that they insist that rates go up on “the rich,” but they’re flexible on how much of a rate increase they’ll support.  Their $1.6T total assumes these rates go all the way back up.

I understand that Team Obama says the rate increases, dividend policy, and estate tax are non-negotiable. Obviously we know that’s not true because they have flexibility on how much the rates would increase, but that’s what they’re saying.

The President proposes to tax dividend income as ordinary income. The President is, I believe left of some Senate Democrats on this question. They left this policy change out of their version of a bill earlier this year.

The same is true on the estate tax. The President says his estate tax proposal ($3.5 M exemption, 45% rate) is non-negotiable, yet the Democratic Chairman of the Senate Finance Committee wants a higher exemption and a lower rate, causing Senate Democrats to leave the President’s estate tax proposal out of their alternative bill earlier this year.

Extending the payroll tax credit is a bargaining chip for the President. I have no doubt he’d trade it away.

Someone needs to explain to me why Congressional Republicans would agree to make “the rich” pay $1.6 T higher taxes to avoid a $1 T tax increase on them if there is no law. The practical ceiling for tax increases on “the rich” in these negotiations seems to be just shy of $1 T.  Team Obama threw the other $600 B in just to frame $1 T later as a huge concession on their part. It’s not and it won’t be when they make this move.

Debt limit

I understand the “no more debt limit votes after this one” provision is being labeled by the Administration as non-negotiable. If that holds, it could by itself be a deal-breaker.

Members of Congress hate voting to increase the debt limit, so some may be tempted by the President’s proposal to do away with it. But neither the President nor his party seem willing to address entitlement spending trends unless forced to do so. Senator Reid refuses to pass budget resolutions, and the President appears to have forgotten about his prior statements of wanting to slow entitlement spending growth. Republicans therefore need to insist on short-term debt limit increases to create repeated deadlines to force spending issues to be considered. Yes, this is messy and undesirable, but if the President and Leader Reid would do their job it would not be necessary.

I recommend leaving a debt limit increase out of this bill, to force a separate negotiation on entitlement spending in Q1 of next year. Future debt limit increases should be of no more than one year each until the Senate starts passing budgets.

Bob Woodward’s book describing the summer 2011 negotiations showed a President whose top priority was getting a debt limit increase big enough to avoid any further fiscal deadlines until after the election. If accurate, that suggests that the President’s new goal might be to get a new debt limit increase to last beyond 2016 so he can get all this fiscal stuff behind him and not be bothered by it.

Spending

Nothing like a cool $175 B more highway spending to start the new year, is there? This is trade bait, but Team Obama also knows that Rs are always tempted by more money for roads.  Note that he didn’t ask for more money for rail or mass transit, or green energy to make it more attractive to Republican spenders.

It appears the President doesn’t want to offset the massive cost of a permanent “doc fix.”  That’s really, really expensive, and it further worsens our Medicare spending problem.

I don’t know enough about the Menendez/Boxer housing bill, but I’ll bet the President would give it up to get a deal.

In this proposal the proposed $1.6 trillion in specific tax increases, hundreds of billions of dollars in detailed spending increases, and zero in specific spending cuts.

Future promises

Follow this logic.

In the summer of 2011, President Obama and Speaker Boehner failed to negotiate a Grand Bargain, so they enacted a law which created a Super Committee of Congress to find $1.2 – $1.5 T of spending cuts. In case the Super Committee failed, that law, the Budget Control Act of 2011, created a backup set of sort-of-across-the-board spending cuts to hit the same $1.2 T spending cut target.

The Super Committee failed, so the spending sequester is scheduled to begin one month from now.

The President, most Democrats and many Republicans in Congress want to reduce or delay the sequester.

The President proposes a one-year delay, which would increase the deficit by $109 B in 2013. He wants to enact (in December) mandatory savings of an equal amount, but he proposes no specifics.

In this offer he promises Republicans that the tax reform and entitlement reform that they so desire will be backed up by the threat of, wait for it, the sequester that will begin in early 2014.

See anything wrong with this logic?

Why should anyone believe that a sequester being delayed now will serve as a useful forcing mechanism to drive legislation in 2013 on Republicans’ top two fiscal priorities?

Senate Minority Leader McConnell was right to laugh at the President’s proposal, and Speaker Boehner was right to call it “silliness.”

This is not a serious offer.

(photo credit: Paul Couture)

The President is bluffing

The President is bluffing

I think the President is bluffing on his veto threat.

Conventional wisdom: To achieve his desired fiscal policy outcome (big tax rate increases on the rich), the President is willing to risk tax increases on all income tax filers.  He is also willing to risk the political blame for middle class Americans paying higher taxes because he thinks he can shift most of the political blame onto Republicans.  He is therefore willing to veto a bill he doesn’t like and bear the consequences of having no bill, if that’s what is needed to gain negotiating leverage.  His veto threat is credible.

This conventional wisdom makes three key assumptions.

  1. The President’s top economic policy priority is his fiscalpolicy goal (raising taxes on the rich).
  2. In a veto / no bill / blame game scenario, the President can shift most of the political blame to Republicans.
  3. He will make his veto decision on these two bases: fiscal policy and relative political blame.

Key flaw in the conventional wisdom:  The President’s veto decision is not about tax increases or political blame; it’s about causing a recession in 2013.

I make different assumptions.

  1. If there is no bill, the U.S. economy will probably dip into recession for much/most/all of 2013, and it’s impossible to predict whether such a recession would be short-lived.
  2. A 2013 recession would be terrible for the country and terrible for the Obama Presidency. It would limit the President’s options across his entire policy agenda, economic and non-economic.  And it could define and dominate his entire second term.
  3. President Obama believes #1 and #2, and therefore avoiding the risk of triggering a recession with his veto is an even higher policy priority than his fiscal policy goal.
  4. The President wants to get things done. He cares more about his own chances for policy success (across the entire breadth of his agenda, whenever he figures out what it is) than he cares about relative political blame.  A scenario in which Republicans get most of the blame for a veto-triggered recession is still a loser for him if it means he can’t accomplish his second term goals.

If my assumptions are correct, then the President cannot afford to veto a bill and have no compromise enacted.  Even if doing so increases dramatically the chance of getting his top fiscal policy priority, and even if he would bear only a small portion of the political blame for a legislative failure and the pain of broad-based tax increases, his veto would trigger a recession that would severely damage his agenda at least in 2013.

President Obama’s veto threat decision is not just about fiscal policy, and it’s not just about who gets blamed for a legislative failure.  It’s about whether the President wants to cause a recession in 2013 and hamstring his second term.  No matter what he or his advisors say, he cannot afford to take that risk.

(photo credit: Kaptain Kobold)

Reactions to the President’s press conference

Reactions to the President’s press conference

I have three quick reactions to today’s Presidential press conference.

1.  The President upped his demands today.  He had been previously been demanding that income tax rates increase on “the rich.” Treasury says that doing so would raise $442 B of revenues over the next decade. Today the President said that “extending further a tax cut for folks who don’t need it, … would cost close to a trillion dollars.” That means his opening bid is assuming much more than just increasing the top two rates.

Using Treasury numbers, one could get to just shy of a trillion dollars by including the following Presidential proposals to “sunset tax cuts” that would affect “the rich” (in all cases, incomes > $200K for single filers, and > $250K for married filers):

  • Increase the top two income tax rates;
  • Phase out the personal exemption for upper-income taxpayers (aka “PEP”);
  • Limit itemized deductions for the rich (aka “Pease”);
  • Tax capital gains at 20% (the pre-2001 rates);
  • Tax dividends as ordinary income (the pre-2003 policy); and
  • Raise estate and gift taxes to 2009 levels.

We may not, however, be able to stop at $1 trillion.  I am told that in other contexts the President’s team (including Acting OMB Director Jeff Zients in public remarks today), are saying the President’s opening bid is not $1 trillion, but $1.5 trillion of new revenues, raised entirely on the individual side.  I am trying to confirm this, and I wish someone would ask Jay Carney what the President’s revenue number is for lame duck / fiscal cliff negotiations. In his press conference, the President used $1 trillion to describe one possible policy outcome, rather than as a description of his negotiating position. That is at least consistent with a higher $1.5 trillion number.

2.  Over the past five days the President and his team have not insisted that tax “rates” go up, but instead that tax “cuts” for the rich not be extended. Like many others I had at first been interpreting that as a sign of potential flexibility, that he might be open to Speaker Boehner’s idea of raising taxes on the rich by limiting or eliminating their tax preferences. I now have a different view, shaped principally by a new understanding of the size of the tax increase the President is requesting.

I think the Administration wants to raise a lot of revenue ($1T – $1.5T), and they know that it is infeasible to raise that much without raising tax rates.

I now think the ambiguity, the choice not to use the word “rates,” was not to allow for negotiating flexibility but instead to allow flexibility to demand more than just rate increases on the rich. By using “tax cuts” rather than “tax rates,” they can make their total opening bid $1 or even $1.5 trillion.

This is a significantly more pessimistic interpretation of the same language than I had previously, and it’s more pessimistic than most other observers.  If I’m right, not using “rates” is part of a strategy to set an absurdly high opening bid, one so high that makes it harder to close a deal during the lame duck session.

3. It seems like the President is thinking about the threat of tax increases (aka “going over the fiscal cliff”) in relative negotiating terms, and not as much in absolute policy terms. That is, his language suggests that he thinks no legislative deal would be worse policy and worse politically for Republicans than it would be for him. If he’s right, then that should give him leverage in the negotiations, because Republicans should be willing to “pay more” to avoid that stalemate outcome.

The problem is that he has a responsibility to think about a stalemate not just in relative terms (and especially not just in relative political/blame terms), but also as a matter of absolute policy.  No matter who gets blamed for it, a legislative stalemate leads to a terrible short-term macroeconomic consequence:  increased unemployment and a new recession, says the Congressional Budget Office. The President’s public posture treats this as if it’s not a big deal because it’s worse for Republicans.  Far more importantly, it would be a terrible outcome for the country.

(White House photo by Pete Souza)

The President sends mixed signals on the fiscal cliff

The President sends mixed signals on the fiscal cliff

President Obama is sending mixed signals on the fiscal cliff.  Here is how I interpreted the President’s statement last Friday (emphasis added today).

I think the most positive thing that can be said about the President’s statement today is that he didn’t say anything that clearly made a deal more difficult.  With one important exception, he didn’t budge on substance …

… The one important exception is that today the president did not insist on raising tax rates on the rich, only that they “pay more in taxes.”  I assume this was intentional.  It allows for at least a portion of the deal like that suggested by the Speaker’s comments:  scale back tax preferences for the rich without raising their marginal rates.  Of course, that’s only part of what the Speaker said was necessary, but it’s a critical part.

My interpretation was far from unique.  Several other observers drew similar conclusions from the President’s apparent constructive ambiguity. It appeared the President was, in reaction to Speaker Boehner, leaving the door open to a deal that raised taxes on the rich but did not raise their tax rates.

But later that same day the President’s press secretary Jay Carney reiterated the President’s prior veto threat:

MR. CARNEY:  The President would veto, as he has said and I and others have said for quite some time, any bill that extends the Bush-era tax cuts for the top 2 percent of wage earners in this country, of earners in this country.

I think that means the President would veto a bill unless the top rates go up.  He is not requiring that they increase to pre-Bush levels (i.e., not requiring that the top rate increase from 35% to 39.6%), but he is requiring that the 35% number increase, since otherwise the bill would be “extend[ing] the Bush-era tax cuts.”

My interpretation of the President’s apparent implicit flexibility is inconsistent with Mr. Carney’s explicit statement.  There are a few possible explanations.

  1. Intentional Presidential head fake – Mr. Carney’s reiterated veto threat accurately represents the President’s position. The President’s apparent constructive ambiguity was a head fake. While it is consistent with the Boehner offer, it is also consistent with no change in the Presidential position. Leaving “higher rates” out of the President’s Friday statement was a head fake to make him seem constructive without giving any ground.  In this explanation we should treat the reiterated veto threat as binding (at least for now), and I was too optimistic in my interpretation of the President.
  2. Intentional mixed signals to play for time – By setting up the President as the good cop and Mr. Carney as the bad cop, they can point to the two conflicting statements depending on the audience. Liberal audiences are reassured by the reiterated veto threat, while reporters are directed to the President’s more open statement that makes him look flexible.  They can then choose later which statement to make the “real” one.
  3. Unintentional Presidential head fake – This is the same as #1, but the head fake was an accident. They didn’t intentionally leave out “rates” from the President’s statement, and observers (including me) jumped to a mistaken conclusion.
  4. Mr. Carney didn’t get the memo – The President is open to the Speaker’s suggestion and intended to signal this in his Friday remarks. Mr. Carney failed to update his talking points to be consistent with the President’s new posture.  In this scenario we should ignore the veto threat, or Team Obama may look for an opportunity to “walk the threat back” in one of their many public events on this topic this week.

I hope Speaker Boehner and Congressional Republicans take advantage of Team Obama’s ambiguity and try to move an agreement forward.  If asked about the Carney veto threat, a Republican should reply, “When they conflict, I take the President’s words as trumping what his staff says. The President sounded like he was leaving the door open to a solution like that suggested by the Speaker. I will remain hopeful of progress unless I hear the President change his language.”  Congressional Republicans should ignore the veto threat for now.

We know that President Obama relishes public fights about tax distribution; he made this issue an important one in his campaign. We don’t yet know whether he is as effective at finding common ground with Republicans as he is at fighting with them.

The fiscal cliff is a test of President Obama’s ability to negotiate with people with whom he disagrees.  He was unsuccessful in this regard in his first term. If he fails again over the next seven weeks, American taxpayers and workers will suffer for it.

(photo credit: Tom Magliery)

Fiscal cliff diving

Fiscal cliff diving

It has been more than a month since I last posted.  With statements Wednesday by Speaker Boehner and today by President Obama about the upcoming “fiscal cliff,” this seems as good a time as any to dive back in.  This initial post will assume a fairly high amount of baseline knowledge.  I may return to the basics in later posts (as I said I would do a while back).

I will describe and interpret both leaders’ statements, then offer a little analysis of the two positions together. I need to emphasize that at this early stage, anyone’s interpretations and predictions are highly speculative. I am doing little more than making educated guesses; then again, so is everyone else.

Both leaders deserve credit for making serious and fairly detailed policy speeches. Both are contributing significantly to the public debate by laying out their views and arguments for all to see. Public policy would be sufficiently improved if we had more serious public discussion like this.

Speaker Boehner’s statement

Speaker Boehner opened that public discussion on Wednesday.

  • He frames the election result, in which President Obama and a House Republican majority were both reelected, as “a mandate for us to find a way to work together,” not “to compromise on our principles,” but instead “to creating an atmosphere where we can see common ground when it exists, and seize it.”  His general tone is cooperative.
  • He leans heavily against trying for Grand Bargain II during the lame duck session. He probably thinks (correctly) that it’s infeasible. Based on earlier press reports, he may also think it’s inappropriate to make such large policy changes with a bunch of retiring members. Better to wait for the new Congress and take the time to do it right.
  • Here is his key language for the next two months:

What we can do is avert the cliff in a manner that serves as a down payment on – and a catalyst for – major solutions, enacted in 2013, that begin to solve the problem.

  • As a policy matter he criticizes temporary policy changes. As a practical legislative matter, he suggests a short-term trade (which I’ll describe in a moment) to buy up to a year to legislate a big fiscal solution.
  • For that bigger solution he is explicit about being willing to agree to more total government revenues, but only under a few conditions:
    • Those revenues should come as part of base-broadening tax reform that produces faster economic growth;
    • That tax reform should lower marginal tax rates;
    • This should “mak[e] real changes to the financial structure of entitlement programs, and reforming our tax code to curb special-interest loopholes and deductions.”
  • He explicitly links higher revenues to entitlement reform that cuts spending:  “[T]o garner R support for new revenues, the president must be willing to reduce spending and shore up the entitlement programs that are the primary drivers of our debt”
  • I can’t find an explicit indication that the Speaker is willing to have higher taxes on “the rich” (however one defines that), but I think it’s implied.  It was certainly true in the Portman/Toomey offer in the SuperCommittee last fall.  More on this in a bit.
  • Finally, he says “the President must lead.”

Here’s my summary of the Boehner formula:

Boehner:  tax reform that lowers marginal rates + real changes to the financial structure of entitlement programs ==> faster economic growth + higher revenues + lower deficits + higher average tax burden on “the rich”

If I am interpreting him correctly, the key trade implied by Speaker Boehner is that Republicans would agree to higher average tax rates paid by the rich, but not higher marginal tax rates.  The rich would therefore pay higher taxes, but the tax on their last dollar of income would not go up.  Thus more revenue would be raised from them, and they would be paying more in taxes, but their incentive to work and invest more at the margin would not be dulled.  The Speaker conveys this by distinguishing between “revenues” and “tax rates.”

Some in the press have reported this as a new policy position for the Speaker. While it’s more directly stated and blunt, I’m not seeing any significant change from his position in the summer 2011 Grand Bargain negotiations with the President. My simple version is that the Speaker is taking his then-private (but well-known) position public, and suggesting an open legislative process instead of private one-on-one negotiations. Any reporter who frames this as a big policy change hasn’t been paying close attention.  Despite everything you’ve read, the bright line that Republicans purportedly drew on taxes was always somewhat blurry.

It is, however, unclear to me what the Speaker means by a down payment to be enacted in the lame duck session.  My best guess is that it might involve some modest entitlement reforms, plus scaling back some tax preferences for high-income tax filers, plus an extension of all current (2012) rates.  If I’m guessing right, the short-term deal would include higher average taxes for the rich but no increases in their tax rates.  I think the Speaker’s long-term framework would require their marginal tax rates to decline as a part of tax reform, rather than just not increase.  I emphasize that here I’m really just guessing.

The President’s statement

OK, let’s do the same with the President’s statement today.

  • “Confrontational” is too strong to describe the President’s language and tone. “Insistent” is probably better.  It’s not surprising that the President insists the election gave him a mandate to implement his fiscal policies.  Key quote:

On Tuesday night we find that the majority of Americans agree with my approach. That’s how you reduce the deficit … with a balanced approach. … So our job now is to get a majority in Congress to reflect the will of the American people.

  • Like Speaker Boehner, the President is reiterating his earlier substantive position.  He wants to extend all income tax rates except for those with incomes greater than $200K/$250K.  He wants those rates “for the rich” to be allowed to increase on January 1 as they will if there is no new law.
  • The President praises the Senate for passing a bill that matches his policy of raising tax rates for incomes > $250K, and he says the House should pass that bill and he would sign it.  But aside from this statement, he does not insist that tax rates on the rich pay more.
  • He also reiterates major elements of his budget: spending increases on education, infrastructure, clean energy, and veterans, along with (a claimed) “$4 trillion of deficit reduction over the next decade.”
  • Interestingly, he does not frame the choice as “raise taxes on the rich to reduce the deficit.”  He instead frames it as “raise taxes on the rich and cut spending to reduce the deficit and make needed investments (i.e., government spending increases).”
  • Once again his key word is that any deficit reduction package must be “balanced.” By this he means that it must raise taxes on the rich.
  • He hits hard, a couple of times, that the short-term solution should be the common denominator – Congress should extend the tax rates except those for the rich.  The top tax rates, he suggests, can then be negotiated as part of a broader fiscal deal next year.
  • He also says

I was encouraged to hear Speaker Boehner agree that tax revenue has to be part of the equation, so I look forward to hearing his ideas when I see him next week.

Here’s my summary of the Obama formula:

Obama:  higher taxes on the rich + spending cuts + spending increases ==> faster economic growth + higher revenues from the rich

It appears that President Obama also has low expectations for a Grand Bargain II during the lame duck session. I think the most positive thing that can be said about the President’s statement today is that he didn’t say anything that clearly made a deal more difficult.  With one important exception, he didn’t budge on substance or even frame his prior positions in a more conciliatory or cooperative manner.  That shouldn’t be too surprising in an opening framing statement for negotiations, but it’s a pretty sharp contrast with the Speaker’s statement yesterday.

The one important exception is that today the president did not insist on raising tax rates on the rich, only that they “pay more in taxes.”  I assume this was intentional.  It allows for at least a portion of the deal like that suggested by the Speaker’s comments:  scale back tax preferences for the rich without raising their marginal rates.  Of course, that’s only part of what the Speaker said was necessary, but it’s a critical part.

Analysis

Let’s compare the two formulas:

Boehner:  tax reform that lowers marginal rates + real changes to the financial structure of entitlement programs ==> faster economic growth + higher revenues + lower deficits + higher average tax burden on “the rich”

Obama:  higher taxes on the rich + spending cuts + spending increases ==> faster economic growth + higher revenues from the rich

Both formulas are incomplete so far, in that neither covers the sequester or the debt limit.  The sequester kicks in January 1 if the law isn’t changed.  The debt limit is on a slightly slower timeline.

Initial press coverage focuses on the possibility of a deal on taxes on the rich.  As you can see, there are a lot of moving parts left to resolve even if they do work out that biggest difference.

The key conclusions I draw about this week are:

  • A Grand Bargain II in the lame duck session is highly unlikely.
  • Both sides appear willing to continue that negotiation next year, maybe through the traditional legislative process rather than in private.
  • A middle ground on one issue could involve higher average tax rates for the rich with no increase, or even a cut in their marginal rates. This could be accomplished by scaling back tax preferences for high income tax filers.
  • The Speaker needs to do this, substantively and politically within his conference, through tax reform.
  • Both sides appear willing to discuss entitlement spending changes.  The Speaker is once again more aggressive on these than the President, and the Speaker insists that any revenue increases must be accompanied by entitlement spending changes (often mislabeled as “cuts”).

Q:  OK, but that’s next year.  What about now?  What’s going to happen between now and the new year?

A:  I have no idea. Neither does anyone else, including the participants.  A smaller version of that deal is, in theory, possible during the lame duck session:  incremental changes to the major entitlements plus scaling back tax preferences for the rich, and keeping all the rates in place for, say, a year.  This could fit the Speaker’s idea of a “down payment on reform,” and could meet the President’s test of having the rich pay more, without crossing the Speaker’s bright line of not raising anyone’s rates.  There are a lot of moving parts in that deal.  It’s possible to do such a deal if both sides are skilled and constructive negotiators.  Those are big IFs.

I apologize for the complexity of this post—there are a lot of moving parts, and I’m doing the best I can to clarify things.  Even if I’m a bit lucky and right on all of this, my answer is still incomplete because it leaves the short-term sequester questions unanswered. I am afraid at this point it’s the best I can do.  I will try to improve my analysis as we move forward.

(photo credit: Sam Effron)

Tax levels cheat sheet

Tax levels cheat sheet

Here is your tax levels cheat sheet.

  • Over the past 50 years federal taxes have averaged 18% of GDP.
  • Governor Romney proposes taxes “between 18 and 19 percent” of GDP.
  • The House-passed (“Ryan”) budget proposes long-term taxes of 19% of GDP.
  • President Obama’s budget proposes long-term taxes at 20% of GDP.*
  • The Bowles-Simpson plan proposes long-term taxes at 21% of GDP.

See how nicely that works?  18-19-20-21

There is a danger that measuring tax levels as shares of GDP will lead to casually concluding that “only one or two percentage points difference” is not a big deal. This would be a huge mistake.

  • GDP this year will be about $15.5 T. That means each 1% of GDP in higher taxes is about $155 B more taken by the government from those who earn it.
  • Going from 19% of GDP to 20% of GDP means a total increase of all federal taxes of just more than 5% (20-19 / 19 = 5.26%)
  • For comparison, the ongoing partisan fight over whether to extend today’s tax rates for “the rich” is a fight about half a percent of GDP. The difference between the Ryan and Obama long-term tax levels is twice as big, and the difference between the Ryan and Bowles-Simpson plans is four times as big. Also, the legislative difficulty of closing these gaps is not linear, meaning it is more than twice as hard to close a gap that is twice as large, because policymakers make the easiest changes first.

I intend this rule-of-thumb to be useful for medium-term and long-term fiscal policy discussions, not  for short-term debates. Federal taxes are pro-cyclical, meaning that when the economy is weak, taxes as a share of GDP drops. Taxes/GDP is quite low right now, but that’s in part because the economy is still quite weak. The above numbers are what each policymaker has proposed for their long-term tax share of GDP, measured 5-10 years from now.  In each case they would start with taxes lower than their long-term share. Taxes/GDP would then gradually climb through the next ten years, stabilizing at the rates specified above.

I put an asterisk after the Obama line. The Ryan and Bowles-Simpson plans would stabilize debt/GDP in the long run, while President Obama’s would not. Since President Obama has not proposed a long-term fiscal policy solution, we don’t know whether his long-term fiscal solution, if he had one, would raise taxes above 20% of GDP.

Few seem to have noticed that Messrs. Bowles and Simpson have proposed long-term taxes that are significantly higher than those proposed by President Obama. The spending component of the Bowles-Simpson plan is between the House-passed (Ryan) plan and the President’s proposal, but it’s much closer to and shaped like the Ryan plan. I think that’s consistent with the political dialogue surrounding it, which sees Bowles-Simpson as a middle ground between the two parties.

But on taxes the Bowles-Simpson plan represents one end of the spectrum, not a middle ground, at least until (if) President Obama proposes a long-term fiscal solution. The tax component of the Bowles-Simpson plan is the highest (“leftmost”) of the three, at least for now. This provokes an interesting question for any elected official, of either party, who says he or she supports the Bowles-Simpson recommendations: “So, as part of a long-term fiscal solution, you’re OK with total tax levels five percent higher than those proposed by President Obama?”

Our long-term fiscal problems are immense, and some elected officials may knowingly choose these big tax increases as part of a package combining spending cuts and tax increases. I wonder, however, if some elected officials who have been attracted by the bipartisanship and centrist optics surrounding the Bowles-Simpson effort understand what they are supporting on tax levels. It would be a shame to unwittingly embrace such a massive tax increase.

(photo credit: David Stillman)

The “insufficient detail” critique of the Ryan budget

The “insufficient detail” critique of the Ryan budget

President Obama’s former budget director, Dr. Peter Orszag, attacked the Ryan budget in the Washington Post. I’ll respond here to his primary critique.

Dr. Orszag argues that the Ryan budget is not a serious fiscal proposal.

In part because of his winning personality, Ryan … has convinced many in Washington that his budget blueprint is a serious proposal for solving our long-term fiscal problems. Unfortunately, it’s not. Let’s dig into the asterisks of Ryan’s plan and unearth the fine print.

Dr. Orszag’s principal critique is that the Ryan budget is short on details. He argues that the Ryan Medicaid block grant, tax reform, and nondefense discretionary spending cuts, are “capping and punting—limiting spending to a certain level but providing no specifics on how to achieve that number.” Later he argues that the lack of legislative detail creates business uncertainty.

The irony is that while in office neither Dr. Orszag nor his boss, President Obama, proposed any long-term fiscal reforms. Even after enacting the Affordable Care Act, which was purported to significantly address our long-term fiscal problems, the Obama Administration’s own numbers show that we’re still headed toward fiscal collapse.

Paul Ryan is chairman of the House Budget Committee. His day job is to develop and pass through the House a budget resolution, to reach a compromise with his Senate counterpart, and then to pass the compromise budget resolution through the House. For the two years he has chaired the committee Mr. Ryan has done his job, passing House budget resolutions in both years. He has been unable to finish his task because the Senate Democratic majority has not done its budget work the last two years. You can’t negotiate with something that doesn’t exist.

A budget resolution is like a blueprint for a new house. A blueprint specifies the size of the house, how many floors there will be, the sizes of each room, and where the walls will go. A blueprint does not specify where the couch will go in the living room or what color it will be.

While studying the draft blueprint, you and your spouse may not yet agree on the position, style, or even type of furniture to put in each room. Reaching such agreement may be quite difficult, and it may depend on how the rooms look once they are actually built. But to approve the blueprint you don’t need to reach agreement on the furniture details at such an early stage. All you need is to agree that the sizes and shapes of the rooms on the blueprint can accommodate the various detail options you are considering.

In the same way, the Congressional budget process separates debate on the topline numbers of fiscal policy from the legislative details of how those numbers will be implemented. Budget Committee Chairman Ryan’s job is:

  1. to set overall fiscal goals for the federal government: total government spending, total taxes, and the deficits and debt that result;
  2. to divide that spending up into about 10 categories (actually it’s divided by committee jurisdiction);
  3. to set legislative processes that will ensure that subsequent legislation complies with Ryan’s numbers; and
  4. to get a majority of the House to vote for all of the above.

After this budget resolution (“blueprint”) has been approved, then legislative action shifts away from Chairman Ryan and the Budget Committee and to the various committees responsible for writing legislation. The House Agriculture Committee develops a farm bill. That committee decides the details of how farm policy will be changed, subject to the numeric limits established in Ryan’s budget resolution. The two committees responsible for Medicare write legislation changing Medicare, which is again required to conform with the numbers in the budget resolution. The Ways & Means Committee writes tax reform legislation, subject to the revenue requirements in the Ryan plan.

To do his job, Chairman Ryan is not required to release any reform plans. He just has to produce a table of numbers, and if he does offer any details on how he thinks Medicare or Medicaid or farm subsidies or taxes should be reformed, those details are not binding on anyone. They are merely his suggestions to the committees responsible for writing the legislative details.

Why, then, might a Budget Committee Chairman publicly propose a broad outline of Medicare or Medicaid reform, or a pro-growth tax reform plan, if they are not binding? For two reasons:

  • To build support among House Members whose votes he needs for his numbers by showing them sample reform plans consistent with his numbers; and
  • To influence the legislative debate that comes later.

When Chairman Ryan approaches you, a House Member, and asks for your support for his budget resolution, you might express concern about the amount his budget “cuts” Medicare spending.  Mr. Ryan can then show you a plan he has developed that meets his spending targets and assuages your concerns on the details. If you vote for his budget resolution you are not, formally, voting for the particular Medicare or tax reform plan that Mr. Ryan assumed. You are only voting for the numbers, the spending and tax levels, that would result from such a plan. And if you don’t like the details of how Mr. Ryan might implement any proposed reform, you have plenty of opportunities to withhold your support for the actual legislation when it is later developed by other committees.

Chairman Ryan has, for example, supported two different versions of long-term Medicare reform. In 2011 he proposed eventually moving all new beneficiaries into a premium support system. In 2012 he teamed up with Democratic Senator Ron Wyden to propose a variant in which traditional fee-for-service Medicare would remain as an option for future beneficiaries. The numbers in the Ryan budget plan are consistent with either version of Medicare reform, and support of the Ryan budget plan allows the Congress to negotiate later on which version of reform makes most sense. Or it would, had the Senate Democratic majority done its work and passed a Senate budget resolution instead of punting again this year.

There is therefore nothing “unserious” about specifying only a broad outline for spending or tax reforms as part of a budget resolution. In fact, it’s standard practice for the legislative process.

On some of the specifics attacked by Dr. Orszag:

  • Medicare premium support plans like Ryan/Wyden date back to the late 90s. The first of significance was proposed by Senator John Breaux (D) and Rep. Bill Thomas (R) in 1998.
  • A Medicaid block grant was passed by a Republican Congress in 1995 and vetoed by President Clinton.
  • The Ryan budget proposes revenue neutral tax reform. To find such a plan, visit DC and swing a cat. You’ll hit two or three.

Dr. Orszag is therefore attacking Mr. Ryan for doing his job as House Budget Committee chairman.  Dr. Orszag argues that Mr. Ryan is being disingenuous by providing insufficient detail on his policy proposals, when it is Dr. Orszag who is taking advantage of general ignorance of the budget process by suggesting that a budget resolution should offer the detail of implementing legislation. As a former director of CBO and OMB, he knows this.

This is a common ploy in fiscal politics. If your opponent proposes policy details, attack the most unpopular of those details. If he does not, attack his credibility for not providing sufficient detail. The only way to avoid this political trap is to avoid proposing any long-term fiscal policy solution and hope no one notices, as President Obama has done so far.

Dr. Orszag also conflates different types of criticisms of the Ryan budget:

  • policy critique: “I oppose policy X in the Ryan budget;”
  • legislative critique: “I don’t think policy X in the Ryan budget can get the votes it needs to become law;” or “If it is enacted, policy X will cause too much policy pain and eventually will be repealed;” and
  • budget credibility critique: “If all policy assumptions in the Ryan budget were implemented as proposed, the numbers still don’t add up.”

Dr. Orszag opposes Mr. Ryan’s proposals for Medicare reform, Medicaid reform, tax reform, and discretionary spending. That’s fine, he’s entitled to his policy opinion.

Dr. Orszag also predicts that Members of Congress would, now or later, fail to support the amount of policy change needed to hit Ryan’s long-term spending and revenue targets. That’s a political/legislative prediction, and to judge it we also need to ask “Compared to what?” In isolation he is correct that it is quite difficult to get Members to vote for painful spending cuts and/or tax increases. But when you’re on your fourth year of trillion+ dollar deficits and the future looks even worse, that’s what leadership requires – making painful and unpopular policy choices. And when the path you’re on leads to a downgrade of the U.S. credit rating or, at some point, complete fiscal collapse, policy changes that were previously out-of-bounds will look less unattractive.

Dr. Orszag then morphs his policy critiques and legislative critiques into an attack on the credibility of Mr. Ryan and his budget plan, deeming it an “unserious” proposal. There is, however, a huge difference between “I don’t like the policies you propose” and “Your numbers don’t add up, your proposals are not serious.” Yes, the Ryan budget would require significant policy changes from our current path. But since our current fiscal path is headed toward disaster, that’s a good thing.

The Ryan budget is a serious fiscal policy roadmap. It proposes the detail required for its intended legislative purpose, and it offers a roadmap for future reforms. And until President Obama and a Democratic-majority Senate propose an alternative long-term path or are replaced, the Ryan plan is literally the only long-term game in town.

(photo credit: Roger Barone/Talk Radio News Service)

What if it’s a status quo election?

What if it’s a status quo election?

I agree with President Obama that this election is shaping up to be a choice between two conflicting economic visions. What happens, though, if the election results in a stalemate between those visions? What happens to economic policy if President Obama is reelected and Republicans retain their House majority?

The Associated Press’ Ben Feller asked President Obama this question yesterday (highlights by me).

AP:  Let’s say you win—okay, that’s a hypothetical that you would probably buy into. But say you win, but the House Republicans win again also, a likely possibility. How is that any different from what we have now? Why wouldn’t a voter look at that and say that’s a recipe for stalemate. How would you do anything differently?

THE PRESIDENT: Well, there are a couple things that I think change. No. 1, the American people will have voted. They will have cast a decisive view on how we should move the country forward, and I would hope that the Republican Party, after a fulsome debate, would say to itself, we need to listen to the American people.

I think what is also true is that because of the mechanisms that have been set up, agreed to by Republicans, that have already cut a trillion dollars’ worth of spending out of the federal deficit, but now we’ve got to find an additional trillion—$1.2 trillion, I guess—before the end of the year, means that the Republicans will have to make a very concrete decision about whether they’re willing to cooperate on a balanced package.

If they don’t, then I’m going to have to look at how we can work around Congress to make sure that middle-class families are protected, but that we’re still doing our—meeting our responsibilities when it comes to deficit reduction and investing in the future.

Here’s my attempted translation:

  • My reelection trumps that of any individual Member of Congress. It also trumps the Republican party’s control of Congress, if that occurs.
  • If I am reelected, I won’t do anything differently.  I will claim an electoral mandate (“they will have cast a decisive view”) and pressure a Republican House [and Senate?] majority to do what I want. Things will be different because my electoral mandate will force them to change their position, even though they too were reelected.
  • If they don’t, in the short term I will link defense cuts scheduled under current law to the tax increases on the rich that I want. I will force Republicans to choose between their top two short-term fiscal priorities by vetoing any bill that restores defense spending without raising taxes on the rich.
  • If they still won’t cooperate, I will try to work around Congress [on fiscal policy?!]

This sounds like half of a recipe for continued stalemate, the premise of Mr. Feller’s insightful questions. All that is needed to complete the recipe is for members of next year’s House, and maybe Senate, Republican majority to believe that their constituents reelected them in part because of their economic policy views.

Logic problem: if you think the fiscal policy stalemate over the past two years is the result of extreme, crazy, intransigent House Republicans who refused to negotiate responsibly, what makes you think they would behave any differently over the next two years if they retain the majority? Why does President Obama, or why should you the voter, assume that they will change their behavior, given how unreasonable you think they have been so far? Won’t they be just as extreme?

A status quo election likely produces a stalemate in lame duck session fiscal negotiations, at least initially. Neither side will be able to legislatively force the other to cave. President Obama could sustain a veto, and Speaker Boehner could control what legislation is considered by the House. Any legislation would therefore have to be agreed to by both men, as well as by Leaders Reid and McConnell, each of whom would have the legislative strength to block legislation they oppose, no matter which party controls the Senate majority. After a status quo election, the two most likely lame duck scenarios are (1) a negotiated middle ground compromise or (2) a stalemate in which the fiscal cliff bites for a while, increasing pain and pressure on both sides until a compromise is reached.

President Obama’s “work around Congress” language confuses me. The Constitution grants the power of the purse to Congress, not the President. President Obama’s ability to take significant fiscal policy actions without a new law is, at best, extremely limited. In the short run he may have some flexibility to control the terms and timing of a sequester if there’s no lame duck deal, and this may give him a little more leverage in that struggle. But he certainly lacks the unilateral authority to raise taxes or to cut or increase spending beyond the amounts now specified in law. He certainly can’t do anything unilateral to address our medium- and long-term fiscal problems.

Mr. Feller asked the President, “How is that any different from what we have now. … How would you do anything differently?” There is one thing that would be different in a status quo election: President Obama would no longer be constrained by the need to be reelected. He, unlike Members of Congress, would have increased policy flexibility if he chose to use it. He could move to the center, as he did briefly after the 2010 election, and negotiate a short-term or even a long-term fiscal policy deal with Congressional Republicans.

If this is his plan, he isn’t giving any hint of it so far. President Obama could have offered Mr. Feller a game-changing answer by announcing a new substantive position. He could have said, “If House Republicans and I are reelected, I will propose a long-term fiscal policy solution based on the Bowles-Simpson recommendations, and I will negotiate in good faith with anyone willing to work constructively toward solving our long-term fiscal problems. I will seek principled compromise, even with those whose views are different from my own.”

Had he given this answer, he would ally himself with a small centrist coalition in the Senate that supported Bowles-Simpson. This would give a centrist/independent voter a concrete answer to Mr. Feller’s question, and would suggest that negotiations between the same parties might turn out differently next time, that a status quo election might not result in a continued fiscal policy stalemate. Such an answer would, however, upset President Obama’s political base, liberals who dislike the Bowles-Simpson recommendations as much as do most Congressional Republicans.

President Obama can still make such a move.  Until and unless he does, President Obama’s answer to Mr. Feller’s question is that, if there’s a status quo election, he would not do anything differently than he has for the past two years of fiscal policy stalemate.

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