A few days ago Speaker Boehner redirected his focus from negotiating an ad hoc Obama-Boehner deal to a more traditional legislative path. Since the Speaker announced plan B at the beginning of the week, the venue for substantive negotiations has shifted from Obama/Boehner to a standard House/Senate dynamic. If the House passes a plan B-like bill soon, I expect that redirection will be complete. This shift is a silver lining to a very dark cloud.

The venue shifts

This venue shift has three important effects.

  1. The venue shift narrows the negotiating scope. Spending cuts, a debt limit extension, and a CPI correction will be deferred until 2013 (notwithstanding Team Obama’s recent petulant claim that they won’t deal with it next year). The scope is now limited to tax changes, with unemployment insurance, a sequester delay, and a Medicare doc fix possible, more likely in separate legislation, but still done this year. Extension of the President’s payroll tax provision is less likely. His infrastructure spending never had a chance in the first place.
  2. The venue shift moves Senate Majority Leader Reid to the forefront of negotiations and moves the President back into a secondary if not a supporting role.
  3. The venue shift makes a legislative solution in 2012 more likely.

For weeks I have been struggling to see a substantive policy sweet spot in the Obama-Boehner negotiations that I thought could be supported by the President and the Speaker and could pass both the House and Senate. I am still skeptical that such a sweet spot exists, largely because I think the President won’t agree to big enough cuts in entitlement spending growth.

In contrast, it is easy to see a sweet spot between the plan B bill the House may soon pass, and S. 3412, which Senate Democrats passed last summer. I don’t know that this new regular order will lead to a solution, but at least there is a clearly visible path to success. The legislative process that begins with a plan B bill is, in effect, plan A. I don’t think there’s another path that has a better chance of successful resolution before year end.

We can see evidence of the venue shifting as Senate Democrats today debate amongst themselves about what their position should be on the House bill. No matter what definition of “rich” they choose, the news is that they are making their own decision, independent of that defined by the President.

Leader Reid enters the spotlight

Assuming the House passes a bill soon, all eyes should turn to Leader Reid. Be wary of his confident statements about what the Senate will and won’t pass. Nobody can possibly know this right now. Leader Reid can only know what he alone will or will not do. He can guess at his colleagues’ behavior, but when he asserts “The Senate will not pass X,” he is bluffing.

He can, however, unilaterally decide what bill the Senate will or will not consider. He can choose not to bring up a House-passed plan B bill, and he can choose not to try to send the Senate-passed bill from July to the House. He can unilaterally choose to have the Senate not act, but if he initiates the legislative process of considering a bill, then all bets are off.

Leader Reid’s challenge is that his standard tactic, not legislating and deferring to the President to negotiate with Republican leaders, is probably unsustainable if the House passes a plan B bill. Leader Reid’s key decision will be if and after the House has passed a bill. Will he sit and do nothing, in an attempt to try to force Speaker Boehner to resume negotiations with the President? Or will he move to proceed to a bill on the Senate floor? If he does the former, then Senator Reid is still acting as the President’s lieutenant, and is trying to keep the Senate in the background. If he begins to legislate, then he is acting as the Senate Majority Leader and he is taking the reins from the President.

The President’s struggle for relevance

As Leader Reid moves to the forefront, the President fades to the background. The driving question changes from “What policies does the President want?” to “What policies can we get enough votes for in the House and Senate?” Until now Congressional Democrats have been drafting behind the President. Speaker Boehner’s move forces Leader Reid to decide whether to continue following President Obama as he takes everyone off the cliff, or instead help Senate Democrats chart their own path to a new law, allowing the President to lead from behind.

I interpret everything I hear from the White House this week as part of a furious struggle to stay relevant. I think the President and his team were surprised by the Speaker’s move, and now they fear being sidelined. Yes, Dan Pfeiffer made a veto threat against the plan B bill yesterday, but the plan B bill will never make it to the President’s desk unchanged, so that veto threat is irrelevant. If it gets to the President’s desk, it will have been modified by negotiations with Senate Democrats, and that particular veto threat won’t apply.

The Obama-Boehner broader substantive talks are dead for 2012. I don’t think the Speaker could restart them even if he wanted to. He and his fellow Republican leaders have invested too much effort into getting House Republicans to support their new path. They can’t change direction again without risking a major revolt. It appears the President and his team either don’t recognize this or they don’t care. As long as Team Obama continues to talk about their failed bigger deal, and about the need to restart talks with the Speaker, they are not contributing to a speedy and successful legislative conclusion. They may, however, be instead investing now in publicly framing a future legislative failure.

Even if Leader Reid were to refuse to take up a House-passed bill, and even if President Obama were today to accept Speaker Boehner’s most recent offer on a bigger deal, there isn’t time to negotiate all the secondary and tertiary details, many of which are as difficult to negotiate as the top-tier stuff. The Obama-Boehner negotiating process has simply run out of time.

A secondary role for the President does not mean that he is irrelevant, or that he won’t become involved again late in the game. It means instead that he is, in effect, acting through Leader Reid. This limits his ability to influence the final product.

This looks to be a colossal negotiating foul-up on the President’s part. Did he never anticipate that the Speaker might go with regular order as the deadline approached and the President continued to play stall-ball?

The sweet spot

I think the following bill could pass the House and Senate before the end of the year.

  • All tax rates below $700K of income are extended permanently as they are now.
  • Above $700K, tax rates revert permanently to their pre-2001 rates: 39.6% for income and dividends, 20% for capital gains;
  • the Personal Exemption Phaseout (PEP) and Pease limit on itemized deductions are not reinstated; and
  • the AMT is permanently patched.

In addition, I think a separate bill or bills pass to:

  • extend unemployment insurance in some form;
  • patch the Medicare “doc fix” for another year; and
  • delay or mitigate the spending sequester for 6-12 months.

In the current vernacular this is the Speaker’s plan B bill but with a $700K income threshold rather than $1M, plus separate bills on UI, doc fix, and the sequester.

I think such a bill would lose votes on both ends of the spectrum, and everyone would complain about something that should be in the bill but isn’t. But I think this bill could pass both houses.

And then, despite all of his current bluster, the President would sign it, in large part because a bunch of Democrats voted for it.

Off the cliff?

It is still quite possible that there will be no new law this year. The greatest threats at this point are House conservatives, Leader Reid, and the President. If we go off the cliff, it will likely be because one of three things happened:

  1. House Republican leaders couldn’t start the process by passing a bill with only Republican votes;
  2. After receiving a House-passed bill or bills, Leader Reid refused to initiate the legislative process; or
  3. President Obama failed to recognize the venue shift and said things to make legislative regular order harder, in a failed and futile attempt to restart the Obama-Boehner talks.

If President Obama were to stay quiet, and if Leader Reid were to bring up a soon-to-be House-passed bill, offer his own substitute amendment, and allow 3-5 relevant amendments per side, this thing would get done.

My prediction

  • 50% chance the sweet spot or something quite close to it becomes law before the New Year begins;
  • 48% chance there’s no new law;
  • 1% chance I’m fundamentally wrong, the Obama-Boehner grand bargain talks restart, and a deal comes together before the New Year; and
  • 1% chance the Mayans had it right, the world ends tomorrow, and we no longer care about the fiscal cliff.

(photo credit: Center for American Progress Action Fund)