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Wonkbook: A deal that found the lowest-common denominator

By Ezra Klein,

Alex Wong VIA BLOOMBERG Assuming no hiccups in the House -- and that might be a big assumption -- we’ve got a deal. The deficit-reduction side includes $1 trillion in cuts now, $1.5 trillion (or more) in deficit reduction later, and a vote on a balanced budget amendment. Meanwhile, it raises the debt ceiling by $900 billion immediately, and either $1.5 trillion (if the second deficit reduction package or a balanced budget amendment passes) or $1.2 trillion (if neither pass) later. Either way, the Treasury should have plenty of borrowing authority to get us to 2013.

Behind the deal is a creative way out of the impasse that’s held up the negotiations: how do you get “balanced approach” if Republicans refused to consider revenues? The solution that both sides seem to have settled on is to substitute defense cuts where taxes would otherwise have gone.

In the initial $900 billion in cuts, almost half will come from “security spending” (which includes defense, homeland security, veteran’s benefits, the State Department, etc). Defense is the big money there, and, according to the White House’s fact sheet, it will take a full $350 billion in cuts on its own. But the real hit comes in stage two: if the second round of deficit reduction isn’t signed into law, the “trigger” that will make automatic spending cuts absolutely savages defense spending.

Let’s stop there and talk about the trigger, as it’s arguably the most important part of the deal. In his remarks on Friday, President Obama said he would support a trigger if it was done in “a smart and balanced way.” The implication was that it had to include tax increases as well as spending cuts, as a trigger with just spending cuts wouldn’t force Republicans to negotiate in good faith. The trigger in this deal does not include tax increases.

What it includes instead are massive cuts to the defense budget. If Congress doesn’t pass a second round of deficit reduction, the trigger cuts $1.2 trillion over 10 years. Fully half of that comes from defense spending. And note that I didn’t say “security spending.” The Pentagon takes the full hit if the trigger goes off.

The other half of the trigger comes from domestic spending. But Social Security, Medicaid and a few other programs for the poor are exempted. So the trigger is effectively treating defense spending like it comprises more than half of all federal spending. If it goes off, the cuts to that sector will be tremendous -- particularly given that they will come on top of the initial round of cuts. Whether you think the trigger will work depends on whether you think the GOP would permit that level of cuts to defense.

If the trigger “works,” of course, it’s never used. Instead, the bipartisan committee produces $1.5 trillion (or more) in deficit reduction, Congress passes their plan and the president signs it. But why should we believe that will happen? If Republicans and Democrats couldn’t agree on major deficit reduction this year, why is it going to be any easier in an election year?

The answer is supposed to be the trigger. Those cuts are meant to be so brutal that neither party will risk refusing a deal. But a deal means taxes, or at least is supposed to mean taxes. And Speaker John Boehner is already promising that taxes are off the table.

In a presentation to his members, Boehner says (pdf) that the rules governing the committee “effectively [make] it impossible for Joint Committee to increase taxes.” Specifically, he’s arguing that using the Congressional Budget Office’s “current-law baseline” makes tax increases impossible, as that baseline assumes the expiration of the Bush tax cuts, and so, if you touched taxes at all, you’d have to raise taxes by more than $3.6 trillion or the CBO would say you were cutting taxes and increasing the deficit.

Confused? That seems to be the point. Boehner is misleading his members to make them think taxes are impossible under this deal. But make no mistake: The Joint Committee could raise taxes in any number of ways. It could close loopholes and cap tax expenditures. It could impose a value-added tax, or even a tax on carbon. The Congressional Budget Office would score all of this as reducing the deficit under a current-law baseline. The only thing that wouldn’t reduce the deficit is going after part of the Bush tax cuts. That means they’re likely to go untouched in this deal.

That’s actually good news for...people who want to raise taxes. The Bush tax cuts will still be set to expire in 2012, which means that if Democrats get some revenue as part of this deal, they’ll be able to get more revenue if Congress gridlocks over the Bush tax cuts in 2012.

But that’s really a technicality. Boehner is promising that he’ll oppose any deal that includes revenue, and unless he decides to break his promise next year, that means the House is unlikely to pass any deal that includes revenue. So that leaves us with three options: 1) there’s no deal and the trigger goes off, 2) the Democrats agree to $1.5 trillion in further spending cuts alongside zero dollars in tax increases, or 3) Republicans agree to revenues.

The upside of this deal is that “the debt ceiling will cave in and Congress will create a global financial crisis for no reason” is not one of the potential outcomes. So that’s something.

The downside is that we actually haven’t come that far: we’re still pretending that a deal a few months from now will somehow be easier than a deal today, we’re moving to austerity budgeting -- note that neither unemployment insurance nor the payroll tax cut are extended -- while the economy remains weak, and we’re putting off the decisions about what to cut and how to handle taxes.

And that gets to the truth of this deal, and perhaps of Washington in this age: it’s all about lowest-common denominator lawmaking. There are no taxes. No entitlement cuts. No stimulus. No infrastructure. Less in actual, specific deficit reduction than there was in the Simpson-Bowles, Ryan, or Obama plans, and even than there was in the Biden/Cantor or Obama/Boehner talks. The two sides didn’t concede more in order to get more. They conceded almost nothing in order to get a trigger and a process, not to mention avoid a financial catastrophe.

There’s reason to be skeptical that a trigger and a process will do much to change these basic dynamics. We’ve now attempted to get a deficit-reducing grand bargain by yoking it to both a near-shutdown and a near-default, not to mention a series of negotiations, commissions, and senatorial gangs. None of it has been enough. And that’s because bipartisan commissions and terrible consequences have not been enough to convince Republicans to agree to revenues, and revenues are fundamental to large deficit-reduction compromise.

Perhaps this deal signals the end of the need to actually reach an agreement, however. If the Joint Committee fails, the trigger begins cutting spending. If negotiations over taxes fail, the Bush tax cuts expire and revenues rise by $3.6 trillion. Neither scenario is anyone’s first choice on policy grounds. But you can get to both scenarios without Republicans explicitly conceding to higher taxes or Democrats explicitly conceding to entitlement cuts in the absence of higher taxes. Politically, that’s the lowest-common denominator, and that might mean it’s also the only deal the two parties can actually make. But that’s because it’s the only deal that doesn’t require, well, making a deal.

Five in the morning

1) We have ourselves a debt deal, report Lori Montgomery and Paul Kane: “President Obama and congressional leaders sealed a deal to raise the federal debt limit late Sunday that includes sharp spending cuts but no new taxes, breaking a partisan impasse that has driven the nation to the brink of a potentially disastrous government default. The deal, negotiated primarily by Vice President Joseph Biden and Senate Minority Leader Mitch McConnell (R-Ky.), teetered all day on the edge of completion, as House Speaker John A. Boehner (R-Ohio) bickered with Democrats over whether to freeze next year’s defense budget. In the end, Boehner conceded the point...If all goes as planned, the package could clear the Senate and then the House as soon as Monday night -- barely 24 hours before Treasury officials have said they could run short of cash to pay the nation’s bills.”

The White House’s breakdown: 1.usa.gov/r2WRFA

Boehner’s: wapo.st/orBGfD

Key points:

-$2.1-$2.5 trillion increase in debt ceiling, lasting until 2013.

-$1 trillion in cuts in defense and domestic discretionary spending over ten years.

-Bipartisan Joint Committee of Congress established to finalize $1.5 trillion in further cuts by November, with Congress required to vote on recommendations.

-If committee fails, automatic cuts to defense, domestic discretionary spending, and Medicare take effect in 2013.

-Required Congressional vote on Balanced Budget Amendment between October and the end of the year.

2) Liberals and hawks might move to block the deal, report Paul Kane and Rosalind Helderman: “Top lawmakers and aides...had identified two potential obstacles: liberals in the Senate and defense hawks in the House...A group of 15 Senate Democrats crowded around one of their leaders, Sen. Charles E. Schumer (D-N.Y.), demanding to know why the framework did not include any increased revenue through tax hikes on the wealthy or the closing of corporate loopholes. The group included the Democratic caucus’s most outspoken liberals, such as Sens. Tom Harkin (Iowa), Barbara A. Mikulski (Md.) and Al Franken (Minn.)...Lawmakers such as Rep. Howard ‘Buck’ McKeon (R-Calif.), the Armed Services chairman and a close Boehner friend, are opposed to the spending levels for next year’s Pentagon budget, and some Republicans fear that the trigger could lead to very steep defense cuts.”

House conservatives like it: politi.co/nFBjl8

House liberals are still pushing for the 14th amendment option: bit.ly/n7F165

3) The deal could worsen a weakening economy, report Binyamin Appelbaum and Catherine Rampell: The nation’s political leaders agreed on Sunday to spend and invest less money in the American economy, a step that economists said risks the reversal of a faltering recovery, in the hope of improving the nation’s long-term prosperity...Last week brought the disconcerting news that the economy grew no faster than the population during the first six months of the year, in part because of spending cuts by state and local governments. Now the federal government is cutting, too. ‘Unemployment will be higher than it would have been otherwise,’ Mohamed El-Erian, chief executive of the bond investment firm Pimco, said Sunday on ABC. ‘Growth will be lower than it would be otherwise. And inequality will be worse than it would be otherwise.’”

4) The House vote will be Boehner’s ultimate test, report Patrick O’Connor and Corey Boles: ”Mr. Boehner told his rank-and-file Sunday night that he had come to agreement with the White House on a deficit-cutting deal that still needs to pass through his chamber. It’s less conservative than the one he jammed through last week, and the vote could go down-to-the-wire. At stake is both the deal itself but also the speaker. If Mr. Boehner has to pass the vote by relying on Democratic votes—and if he loses more than half of GOP lawmakers in the process—he might avert default while imperiling his effectiveness as a leader.”

5) Markets are rallying in reaction to the deal, reports Cezary Podkul: “Asian stock markets soared as the White House and congressional leaders announced they had at last reached a bipartisan compromise to raise the country’s borrowing limit, averting the possibility of a U.S. default two days ahead of a deadline for a deal. Japan’s Nikkei 225 index, which includes major Japanese companies, bounced 1.83 percent in early trading in Tokyo on Monday after opening up 0.75 percent. The Standard Poor’s 500/ASX 200 index, a measure of Australia’s blue-chip stocks, rose 1.95 percent after opening up 0.36 percent before the announcement. Singapore’s benchmark Straits Times index began trading up 0.77 percent, while South Korea’s benchmark KOSPI edged up 1.69 percent and Hong Kong’s Hang Seng index moved 1.49 percent higher.”

Lo-fi interlude: Guided by Voices play “Game of Pricks” live.

Got tips, additions, or comments? E-mail me.

Still to come: Commentators react to the debt deal; the economy has gotten really, really bad; a rundown of health reform’s implementation challenges; spending cuts by committee almost never works; Obama has made his gas mileage deal official; and a dead squid comes alive when you pour soy sauce on it.

Debt deal reactions:

Obama has surrendered, writes Paul Krugman: “The reported terms of the deal, which amount to an abject surrender on the part of the president. First, there will be big spending cuts, with no increase in revenue. Then a panel will make recommendations for further deficit reduction -- and if these recommendations aren’t accepted, there will be more spending cuts. Republicans will supposedly have an incentive to make concessions the next time around, because defense spending will be among the areas cut. But the G.O.P. has just demonstrated its willingness to risk financial collapse unless it gets everything its most extreme members want. Why expect it to be more reasonable in the next round? In fact, Republicans will surely be emboldened by the way Mr. Obama keeps folding in the face of their threats.”

Obama didn’t cave, he just had a weak hand, writes Matthew Dickinson: “The reality is that this budget outcome had nothing to do with personal weakness, and everything to do with political weakness. The truth is that Obama is fighting for his political life...Obama had two imperatives during this fight: prevent a default and get this issue off the table until after 2012. Period. To achieve that he would have gone as far Right as the Democratic Left would allow. And, in the end, he pretty much did and he accomplished his two objectives. In short, this is probably the best deal Obama was going to negotiate...I’m not saying Obama handled this flawlessly, although I’m hard pressed to point out obvious specific errors. But the result was always likely to come out pretty much where it did, when it did.”

Obama made three strategic mistakes, writes Jonathan Chait: “Going back to December, the Democrats committed a massive blunder by failing to push for a debt ceiling increase...Then, last spring, Obama committed blunder number two. Republicans began voicing opposition to raising the debt ceiling, or insisting on massive concessions in order to do so. The correct response here was to refuse to negotiate. Obama simply needed to say, we’re raising the debt ceiling the way we always have, because the alternative is catastrophe...The third mistake lay in assuming Republicans would agree to raise tax revenue. I spoke several times with administration officials who asserted with total confidence that Republicans would simply have to acknowledge the need for more revenue. They betrayed a complete misunderstanding of the party they’re dealing with.”

The deal emphasizes the need to reform Congress, write Jacob Hacker and Oona Hathaway: “It is time to pursue reforms that allow Congress to act effectively. While it’s easy to assume that more checks are always desirable -- that the harder it is to make policy decisions, the better they will be -- the debt crisis shows this isn’t true. Failing to raise the debt ceiling stops money already approved by Congress from being spent. If lawmakers see the debt ceiling as real, they will exercise less judgment in the ordinary budget process, on the reckless belief that fiscal restraint can somehow be imposed down the road. Legislative obstacles like the debt ceiling are a source of mischief, not precaution...Unnecessary supermajority requirements are another culprit -- the Senate filibuster chief among them.”

Entitlement cuts shouldn’t be sacred to liberals, writes Mark Schmitt: “reating the entitlements as sacred comes at a huge cost in all the other programs. While there’s surely waste in domestic discretionary programs, from agriculture subsidies to the occasional National Science Foundation grant that sounds silly, it also includes education, energy research, transportation--and basically everything that constitutes the investment in economic growth that we need far more than we need budget austerity. And while it might make some sense to insist on holding Social Security untouchable...it’s very strange to take the same approach to Medicare, which is projected to consume 5.5 percent of GDP by 2035, up from 3.6 percent today, without providing better services or serving significantly more people. Protecting the current Medicare cost curve cannot be considered a fundamental progressive principle.”

The deal won’t help the economy or decrease the debt load, writes Matt Miller: “Washington will do nothing more to boost jobs and growth. The best that can be said is that the spending cuts will be tiny in the next two years, so the feds won’t be contracting demand, save for the end of the stimulus. Our epic jobs crisis remains ignored. Next -- as to long-term deficit reduction, supposedly the reason the GOP put the country through this costly fiasco -- the deal remains utterly inadequate, even if the joint congressional committee the plan would empower to address this succeeds...We’ll have trimmed less than 6 percent from federal spending that is already slated to increase from $3.6 trillion to $5.7 trillion by 2021.”

The deal is a Tea Party victory, writes Marc Thiessen: “Today, no one is talking about tripling the national debt or passing a “second stimulus.” Congress is about to cut spending by about $2 trillion and put us on a trajectory to balance the budget within a decade. Senate Majority Leader Harry Reid complained Saturday evening that Congress has raised the debt limit 74 times since 1962 without conditions. He is right. This is happening for the first time in history, thanks to the Tea Party. Consider that less than a week ago, President Obama addressed the nation, demanding that Congress include higher taxes in any debt-limit deal. According to Senate Republican leader Mitch McConnell, the proposed deal has no tax increases. The Tea Party took tax hikes off the table and held the line -- another major victory.”

Heritage Action opposes the deal: “While this deal is moving in the right direction rhetorically thanks to pressure from conservatives, it still falls well short of the standards we have consistently laid out. At its core, the deal still relies on an insufficient level of cuts immediately in return for raising the debt ceiling over $2 trillion. We are skeptical of ‘super committees’ tasked with brokering grand bargains and we are adamantly opposed to committees that are given the authority to raise taxes on the American people and to bring about the gutting of our national defense budget. This deal highlights how dysfunctional Washington has become and we will continue to oppose it as insufficient to the task at hand.”

There’s less to the deal than meets the eye, writes Josh Barro: “The near-term fiscal changes are so small that they will matter very little for the economy. The long term changes will be subject to revision by future Congresses and will hopefully come when the economy is healthier--and the parts that do go into effect will probably not be that different from whatever fiscal adjustment we were going to have to enact sooner or later...We can expect that the Super Committee’s discretionary spending cuts will again be backloaded, and therefore subject to future changes...It is possible that we will get some good entitlement reforms out of the Super Committee, which will be a nice bonus on top of the debt ceiling increase. If not, for all the Sturm und Drang, this deal will have been a lot like a clean hike in the ceiling, which is fine with me.”

The deal is a defensible compromise, writes Rich Lowry: “Who says compromise isn’t possible any more in Washington? This thing, as I understand it, has a little something for everyone. The basic structure is Boehner’s two-tier process with the first tranche roughly matching cuts, as traditionally defined in Washington, with a $900 billion debt increase. Then, there’s the second tranche. It’s a mash of Boehner, Reid, and McConnell...As discussed in here the last few days, this deal is clearly inadequate to our fiscal challenges. But liberals are screaming about it. I’m surprised Reid didn’t get more. Clearly, the bottom line the White House cared about most was putting another debt limit fight beyond the election, and even that-depending on economic conditions-could be in doubt if he only gets $1.2 trillion in the second tranche.”

Economy

The economy took a nosedive last quarter, reports Renae Merle: “Cutbacks by cash-strapped state and local governments helped restrict economic growth to anemic levels, according to fresh data Friday, signaling a weakening recovery as lawmakers continue to wrangle over the nation’s spending. The report from the Commerce Department showed the economy grew at a snail’s pace of 1.3 percent in the spring, sapping hopes that the recovery would pick up later this year. Perhaps even more alarming was that the agency said the economy in the first three months of the year was far worse than it had been initially estimated, with growth at a near standstill. Economists said that the trajectory of the recovery could hinge on the outcome of the rancorous debate over the amount the nation can borrow. And the data inflamed the partisan debate about the government’s role in stimulating the economy.”

Super-committees tend not to work, writes David Fahrenthold: “There is a problem with this idea: Similar ‘super’ working-groups have been tried before -- and they haven’t always delivered super results. In fact, one of the few things that will make the committee’s job easier is that a lot of the ground has already been covered...’They tend not to work,’ said Sarah Binder, a historian of Congress at George Washington University. The problem, Binder said, is that the factors that keep the whole Congress from solving hard problems usually reappear in a smaller committee...The two parties have both acknowledged that this super-committee process could fail. In fact, one of the main points of contention has been what to do if the committee itself can’t agree -- or if Congress rejects the committee’s ideas.”

Goldman Sachs’ business model is in danger post-crisis, reports Christine Haper: “Bungled public relations and a thirst for a scapegoat for the worst U.S. economic crisis since the Depression may explain the shift in the firm’s reputation under Chairman Lloyd C. Blankfein. Or perhaps it’s something more fundamental: His reliance on trading and investing the bank’s capital to reap profits, even if it has meant competing with clients...Blankfein’s business model was ideal for a period of high leverage and low regulation, producing average annual profits more than double those achieved under his predecessor, Henry Paulson. As capital rules and limits on proprietary trading take effect, those profits will be harder to achieve, said analysts including Fiona Swaffield of RBC Capital Markets.”

The best way to keep the debt under control is to prevent a future fiscal crisis, writes Simon Johnson: “Why was the financial crisis so devastating to the real economy? The answer is that, in large part, financial firms had become so highly leveraged, meaning they had very little real equity relative to their assets. This was a great way to boost profits during the economic boom, but when the markets turned, high leverage meant either that firms failed or had to be bailed out...Many House Republicans -- including some who say they are fiscal conservatives -- as well as some House Democrats remain strongly in favor of lowering capital requirements. But any true fiscal conservative should fight to strengthen the legislative and regulatory safeguards that aim to make the financial system less prone to collapse. Pushing for lower capital requirements in the financial system poses a major fiscal risk.”

Bernanke has done a fine job as Fed chair, writes Greg Mankiw: “Could the Fed have done substantially more to avoid the recession and promote recovery? Probably not. The Fed used its main weapon against recession -- cuts in short-term interest rates -- aggressively as the depth of the downturn became apparent. And it turned to various unconventional weapons as well, including two rounds of quantitative easing -- essentially buying bonds -- in an attempt to lower long-term interest rates. A few economists have argued, with some logic, that the employment picture would be brighter if the Fed raised its target for inflation above 2 percent...Even if that were true, a higher inflation target is a political nonstarter. Economists are divided about whether a higher target makes sense, and the public would likely oppose a more rapidly rising cost of living.”

It’s ALIVE interlude: Dripping soy sauce makes a dead squid dance.

Health Care

Health reform implementation is already raising a number of questions, write Jennifer Haberkorn, Jason Millman, and Lester Feder: “One of the reform law’s biggest changes to the insurance market will come in 2014, when state-run health insurance marketplaces known as exchanges will launch. But whether those get off the ground in time remains one of health reform’s greatest mysteries...Just 13 states have passed legislation this year to either build or study an exchange, while six states have found ways around the legislative process to get their exchange rolling. Exchange bills died in 15 states this year, as others are taking their time to study the best way forward. The Department of Health and Human Services issued the first of several exchange rules last month, but it still left many questions unanswered.”

Health exchanges could encourage entrepreneurship, reports Jill Lawrence: “The Department of Health and Human Services this month released guidelines on how to set up exchanges, and more than half the states already are taking steps to build them. Once they’re up and running, you’ll be able to quit your job at Large Company X and start that plumbing or carpentry business, that mom-and-pop restaurant or barbershop, without putting your family’s health or finances at risk...There’s nothing more American than starting a business. Yet contrary to our self-image, most developed countries have larger small-business sectors than the United States does. The Affordable Care Act could help close the gap -- and spur the economy -- by removing an obstacle to business creation and self-employment.”

A new rule would punish hospitals with high readmission rates, reports Jordan Rau: “When hospitals discharge patients, they typically see their job as done. But soon they could be on the hook for what happens after Medicare patients leave the premises, and particularly if they are re-admitted within a month. In an effort to save money and improve care, Medicare, the federal program for the elderly and disabled, is about to release a final rule aimed at getting hospitals to pay more attention to patients after discharge. A key component of the new approach is to cut back payments to hospitals where high numbers of patients are re-admitted, prodding hospitals to make sure patients see their doctors and fill their prescriptions. Medicare also wants to pay less to hospitals with higher-than-average costs for patient care.”

Florida is refusing millions in health care funding, reports Kevin Sack: “When it comes to pursuing federal largess, most of the states that oppose the 2010 health care law have refused to let either principle or politics block their paths to the trough. If Washington is doling out dollars, Republican governors and legislators typically figure they might as well get their share. Then there is Florida...The state has turned away scores of millions of dollars in grants made available under the Affordable Care Act. And it is not pursuing grants worth many millions more. In recent months, either Gov. Rick Scott’s administration or the state’s Republican-controlled Legislature has rejected grants aimed at moving long-term care patients into their homes, curbing child abuse through in-home counseling and strengthening state regulation of health premiums.”

Rise of Skynet interlude: A robot that flies just like a bird.

Energy

Obama announced new mileage rules, reports Andrew Restuccia: “President Obama took a short break from the chaos of the debt-ceiling negotiations Friday to unveil a major compromise agreement to boost federal fuel economy standards. The agreement was negotiated in a slew of closed-door meetings with the country’s major automakers...Obama outlined a plan to ratchet up fuel efficiency and cut harmful carbon pollution for model year 2017-2025 cars and light-duty trucks. The plan sets a fleet-wide average standard of 54.5 miles per gallon by 2025. The final standard represents a retreat from an earlier proposal floated by the administration, which called for a 56.2 mpg standard. Both standards fall short of the 60 mpg goal environmental groups have been pushing for months. But Obama nonetheless touted the compromise as ‘the single most important step we’ve ever taken as a nation to reduce our dependence on foreign oil.’”

Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams.

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