Wonkbook: Three reasons the debt deal collapsed
Last week's sudden and inexplicable burst of debt-deal optimism is over. But don't ask why the $4 trillion deal collapsed. That's like asking why John Boehner didn't sprout wings and fly. Ask why anyone ever thought it'd take off in the first place.
Nothing changed between Thursday, when the grand bargain was apparently alive, and Sunday, when the papers solemnly recorded its time of death. But the real tell was that nothing had changed between the week before last, when a $2 trillion deal was too tough for the negotiators, and last week, when a $4 trillion deal was suddenly posited as possible. So asking "what went wrong?" isn't so much about what we've learned in the last few days as it is about what we already knew, but perhaps did not want to admit.
It does not matter if John Boehner is a reasonable man. The White House likes John Boehner. They feel -- or at least felt -- he's someone they can do business with. But they're learning that they're not actually doing business with Boehner. They're doing business with the Republican Party. And Boehner isn't the Republican Party. In fact, of the four major figures in the GOP leadership -- Mitch McConnell, Eric Cantor, and Jon Kyl -- Boehner is perhaps least representative of the modern Republican Party. The main reason people thought we might have a deal last week was because Boehner said he wanted one. The deal's collapse is, first and foremost, a reminder that what Boehner wants really doesn't matter.
For Republicans, this isn't about deficits. It's about spending and taxes. If this were really about deficits, a win-win would be possible. Easy, even. Republicans want spending cuts, and those cut the deficit. Democrats want revenues, and those cut the deficit. See where I'm going with this? But where Democrats really are arguing over deficits -- note their willingness to give more in spending cuts if Republicans will give more in revenues -- Republicans want less deficit reduction because it'll mean Democrats have less leverage with which to demand tax increases.
For a deal to be possible, something will need to change. We've reached an equilibrium where Republicans can't accept any revenues and Democrats can't accept a deal without any revenues. And I use the word "revenues" advisedly. There was a brief, shining moment when it seemed the deal would be changes to the tax code that did raise revenues but didn't increase rates and so Republicans wouldn't count as tax increases. But Cantor and others have made clear that they will oppose any net increase in revenues. So there's no deal until something breaks the equilibrium. Right now, the most likely candidates, in order, are public fury arising out of a government shutdown or a market panic arising out of near-default.
I'll end on a more speculative note: Republicans might come to regret rejecting Boehner's deal. Few noticed that his framework for new revenues was comprehensive tax reform -- which would preempt the expiration of the Bush tax cuts. In other words, he was finishing the tax debate during the debt-ceiling debate, when Republicans have most of the leverage, rather than letting it drift linger into 2012, when the Bush tax cuts are set to expire and Democrats will have most of the leverage. If Republicans could've agreed with Democrats this year, taxes would have gone up by $1 trillion. If they can't agree with Democrats next year, they'll go up by $4 trillion. And Republicans had a better hand this year than they will next year. I expect they'll come to wish they'd played it.
Five in the morning
1) Sunday's debt limit negotiations ended in deadlock, report Scott Wilson and Lori Montgomery: "Talks among President Obama and congressional leaders Sunday evening failed to break a partisan stalemate over how to raise the federal borrowing limit, leaving the politically charged negotiations in limbo three weeks before the administration says the country will begin to default. The White House meeting adjourned after roughly 75 minutes without agreement over how far the parties should go in cutting the deficit over the next decade or whether tax cuts and entitlement reductions should be a part of any deal. Congressional leaders will return to the White House on Monday to continue talks, administration officials announced, and Obama will hold a morning news conference before they do. Both sides appeared Sunday to dig further into their positions, leaving the talks deadlocked."
2) John Boehner has rejected the idea of a $4 trillion "big deal", reports Paul Kane: "For months, House Speaker John A. Boehner (R-Ohio) has been urging President Obama to do the 'big deal' on debt talks. Using his oft-repeated refrain in a mid-May television interview, Boehner summed up his message this way: 'Come on, you and I, let’s lock arms and we’ll jump out of the boat together.' Late Saturday, on the eve of a pivotal meeting on the potential blockbuster budget-and-tax deal, the GOP speaker got to the edge of the boat and decided that the water was too deep, too choppy. Reaching Obama at Camp David by phone, Boehner informed the president that their impasse over taxes was irreconcilable. A tax increase as envisioned by Obama, approximately $800 billion out of a package that would save more than $4 trillion, would never be approved in the increasingly conservative House."
3) The last time the US defaulted had lasting consequences, reports Brady Dennis: "There was one short-lived incident in the spring of 1979 that offers a glimpse of some of the problems and costs that might arise if the stalemate on Capitol Hill continues. Then, as now, Congress had been playing a game of chicken with the debt limit, raising it to $830 billion - compared with today’s $14.3 trillion - only after Treasury Secretary W. Michael Blumenthal warned that the country was hours away from the first default in its history. That last-minute approval, combined with a flood of investor demand for Treasury bills and a series of technical glitches in processing the backlog of paperwork, resulted in thousands of late payments to holders of Treasury bills that were maturing that April and May...'That the series of defaults resulted in a permanent increase in interest rates' of more than half a percent, which over time translated into billions of dollars in increased interest payments on the nation’s debt."
4) We can fix the unemployment problem, but won't, writes Paul Krugman: "a destructive passivity has overtaken our discourse. Turn on your TV and you’ll see some self-satisfied pundit declaring that nothing much can be done about the economy’s short-run problems (reminder: this 'short run' is now in its fourth year), that we should focus on the long run instead. This gets things exactly wrong. The truth is that creating jobs in a depressed economy is something government could and should be doing. Yes, there are huge political obstacles to action — notably, the fact that the House is controlled by a party that benefits from the economy’s weakness. But political gridlock should not be conflated with economic reality. Our failure to create jobs is a choice, not a necessity — a choice rationalized by an ever-shifting set of excuses."
5) Unemployment is high and isn't budging, and Washington is doing nothing to respond, reports Catherine Rampell: "In some ways, this boils down to math, both economic and political. Yes, 9.2 percent of the American work force is unemployed — but 90.8 percent of it is working. To elected officials, the unemployed are a relatively small constituency. And with apologies to Karl Marx, the workers of the world, particularly the unemployed, are also no longer uniting. Nor are they voting — or at least not as much as people with jobs. In 2010, some 46 percent of working Americans who were eligible to vote did so, compared with 35 percent of the unemployed, according to Michael McDonald, a political scientist at George Mason University. There was a similar turnout gap in the 2008 election. No wonder policy makers don’t fear unemployed Americans. The jobless are, politically speaking, more or less invisible...But why? It’s partly because of the greater dispersion of the unemployed, and partly because of the weakening of the institutions that previously mobilized them.
Electronica interlude: Jamie xx's "Far Nearer".
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Still to come: Even a short default can permanently raise interest rates; Democrats are split on Medicare's new cost-cutting board; Social Security reform will likely involve changes to its cost-of-living formula; the GOP hasn't accomplished much on energy so far; and a 2 year old does yoga.
Financial regulators regularly mingle with the industries they regulate at conferences, reports Laura Hautala: "Want to talk to a Dodd-Frank rule writer? Try Las Vegas. Traveling to glitzy locales to meet with regulators responsible for ironing out the details of the new financial regulation law has been a tactic for bankers and traders hoping to persuade regulators to keep bank capital requirements low, to lessen position limits on trading derivatives and to shield commodity-buying businesses from new swap rules -- the next targets on the banking industry’s hit list. Attendance at conferences put on for participants in commodities markets has shot up this year, a leader in the commodities world said, as regulators zigzag across the country on their agencies’ dime giving speeches on key rules and mingling with attendees over hors d’oeuvres and cocktails."
The EU isn't built for challenges like the Greek crisis, writesTyler Cowen: "The wealthier European Union nations could transfer funds to Greece and the central bank as permanent debt relief, rather than continuing with debt rollovers that may look similar to Ponzi schemes. As it stands, vulnerable countries are being pushed into ever-higher debt levels. Yet the central bank has strict rules, including a no-bailout clause and price stability as the sole goal of monetary policy, while the European Union often requires member unanimity for major changes. In other words, these rules were written to prevent what is now the only coherent response to Greece’s troubles -- namely, a timely recognition of the losses and an agreement that they will be shared jointly in some way."
Congressional Republicans are actually negotiating intelligently,writes Ross Douthat: "For months, liberals have expressed frustration with the president’s deficit strategy. The White House made no effort to tie a debt ceiling vote to the extension of the Bush tax cuts last December. It pre-emptively conceded that any increase in the ceiling should be accompanied by spending cuts. And every time Republicans dug in their heels, the administration gave ground. The not-so-secret secret is that the White House has given ground on purpose...Obama’s political team wants to use the leverage provided by those cra-a-a-zy Tea Partiers to make Democrats live with bigger spending cuts than they normally would support. Why? Because the more conservative-seeming the final deal, the better for the president’s re-election effort. In that environment, Republicans have every incentive to push and keep pushing."
Kids have the darndest exercise regimens interlude: A 2 year old does yoga.
Democrats are split on defending the Independent Payment Advisory Board, reports Jennifer Haberkorn: "IPAB was created under the health care overhaul law to control the rising costs of Medicare...But some Democrats, as well as most Republicans and health care providers, argue the panel could arbitrarily cut services to Medicare patients and payments to providers with little congressional oversight...New Jersey Rep. Frank Pallone, of the Energy and Commerce health subcommittee, has zero interest in defending the board...Several health reform supporters -- such as the American Medical Association, the National Committee to Preserve Social Security and Medicare, and Democratic Rep. Allyson Schwartz of Pennsylvania -- have voiced support for a Republican plan to repeal the measure."
Mitt Romney isn't the only GOPer with a health care problem,reports Alec MacGillis: "The universal health care that Mitt Romney passed as Massachusetts governor has proven to be a popular target for his critics. But it could be Romney’s good luck that his two main establishment rivals for the GOP nomination are less than ideally positioned to capitalize on this liability. When they set out to reform health care in their states, both Jon Huntsman, former governor of Utah, and Tim Pawlenty, former governor of Minnesota, considered the same tools that Romney adopted, including a mandate that people obtain health insurance and a state “exchange” where they could buy it. Both men ended up settling for reforms far more limited than Romney’s. But their records have left them open to charges of hypocrisy when they blast the Massachusetts and national health-care laws."
We don't have proof that Medicaid makes people healthier,writes Peter Suderman: "The study in question looked at the effects of Medicaid in Oregon, which in 2008 chose 10,000 individuals to enroll in Medicaid via lottery. The random nature of assignment made it easy to control for outside factors and avoid the strong selection bias that normally makes such experiments dicey. The study does indeed show that individuals enrolled in Medicaid used far more in the way of health care services of just about every kind except emergency room visits...But greater utilization of care is not the same as better health...Those who won the Medicaid lottery are reporting that they feel better about their health. Does that mean they’re actually healthier? Not necessarily."
Any Social Security cuts in the debt deal will likely focus on the rate of benefit growth, reports Brian Beutler: "As explained at length here, the idea is to peg federal Cost of Living Adjustments to a new, stingier measure of inflation. Experts say the new index (the so-called Chained Consumer Price Index) is a more realistic metric for measuring inflation's impact on peoples' behavior...Reducing the COLA is something top Obama administration officials have wanted to do for a long time. 'The Consumer Price Indices currently used for indexation employ an outdated procedure that overstate inflation,' said Jason Furman, now the Deputy Director of the National Economic Council, in 2007 expert testimony before the Senate Budget Committee."
Infrastructure boosters give too-rosy cost estimates, writesVirginia Postrel: "'Infrastructure' may be one of the least glamorous words in the English language, but with the right touch the concrete and steel of roads, bridges, tunnels, dams and railroads can look as alluring as a movie star...This glamorizing extends not just to imagery but also to forecasts. Project promoters routinely overstate benefits and understate costs -- and not just a little bit. 'Cost overruns in the order of 50 percent in real terms are common for major infrastructure, and overruns above 100 percent are not uncommon,' Bent Flyvbjerg, a professor of major program management at the University of Oxford’s Said Business School, writes in the Oxford Review of Economic Policy."
Summer hiatus interlude: Parks and Recreation's Ron Swanson, versus food.
The GOP hasn't made much progress on its energy agenda,reports Darren Samuelsohn: "House Republicans will bow to their tea party base on Monday by bringing up legislation to save the incandescent light bulb. But for those keeping score at home, the proposal...is likely to land in the same dustbin now home to many other GOP energy proposals. Republicans say Senate gridlock is the primary reason none of their big energy ideas has reached President Barack Obama’s desk. But the symbolic posturing behind much of the GOP agenda has left the majority with few accomplishments beyond bringing Styrofoam cups back to House cafeterias...California Democratic Rep. Henry Waxman poked at the Republicans last month by noting that out of the 417 bills and resolutions referred to the Energy and Commerce Committee, the GOP-led panel approved just 12. And none has made it to the president."
Nuclear fusion energy is now possible, writes Stewart Prager:"Harnessing nuclear fusion, the energy that powers the sun and the stars, has been a goal of physicists worldwide since the 1950s. It is essentially inexhaustible...Seven partners -- the European Union, China, India, Japan, Russia, South Korea and the United States -- have teamed up on an experiment to produce 500 million watts of fusion power for 500 seconds and longer by 2020, demonstrating key scientific and engineering aspects of fusion at the scale of a reactor. However, even though the United States is a contributor to this experiment, known as ITER, it has yet to commit to the full program needed to develop a domestic fusion reactor to produce electricity for the American power grid...What has been lacking in the United States is the political and economic will. We need serious public investment."
Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams.