What will the next ‘fiscal cliff’ look like?

December 3, 2012

Hey, if you're going to do a debt plan trigger, why not a real trigger?

Presumably, Congress will soon find a permanent solution to the austerity that will keep the economy growing (or perhaps even speed it up a bit) next year while addressing the longer-term debt problem. That will be the end of this sorry period in American politics, in which Congress continuously set up ever-more draconian consequences to incent its future self to make the hard decisions its current self kept putting off.

Hahaha, no, but seriously. This is Congress we're talking about, and the last time they had to pass a deal like this we didn't end up with an actual deal so much as a series of punishments (most notably the automatic sequester set to take effect Jan.1) meant to force a future Congress to make an actual deal at some later date.

Now that those punishments are looming, most expect Congress to build some kind of framework to delay those punishments and buy ever more time to craft a fiscal deal.  But that means they need a new set of punishments to force that deal. It's fiscal cliffs all the way down, but what kind of fiscal cliffs? Here are some options that have been floated as potential triggers to be included in a fiscal cliff deal.

Automatic sequester, the second: Perhaps the easiest trigger to pass would be another sequester, a set of unpalatable cuts and possibly tax increases meant to take place automatically should a deal not be reached by a certain deadline.

One way to do this would be to simply use the sequester we have now: Just delay it to take effect a year later than scheduled.

But given that that hasn't proven incentive enough to pass a deal this time around, policymakers might want a trigger with slightly more bite. One option is the Bipartisan Policy Center's "framework for a grand bargain," which is meant to provide procedural tools to ease passage of a debt plan next year.

The BPC proposal would require a $4 trillion deficit reduction plan but allows it to pass with a simple majority of present and voting members in each chamber. That means no filibusters. Debate is limited to 20 hours, no exceptions, and after a conference committee lasting a maximum of two weeks, 10 hours of debate are allowed on the final bill.

If even those procedural tools aren't enough, the BPC plan introduces a sequester-like "backdrop" plan. But instead of 50-50 cuts in defense and nondefense spending (with a dollop of Medicare provider cuts for good measure), the BPC backdrop is split half and half between cuts to tax expenditures (like deductions, credits and exemptions) and to mandatory programs other than Social Security (Medicare, Medicaid, food stamps, etc.). The idea is to have a "severe but workable" debt plan that, while not politically palatable, addresses the same policies that a more worked-out debt deal would.

But the BPC backdrop could actually prove less palatable than the sequester. Neither side sounds particularly enthused about large cuts to tax breaks, especially the charitable deduction and especially to breaks for middle-class people, and Republicans have expressed considerable hesitance about raising taxes at all. And Democrats are likely to reject subjecting not only Medicare but also Medicaid, food stamps and other entitlements for the poor to cuts. When Republicans proposed Medicare cuts in the summer of 2011, then-OMB director Jack Lew reportedly started yelling, "No means no! No! No! No!"

A tax sequester: According to Senate Democrats, the BPC option of a failsafe that includes a cap on tax deductions is being floated in negotiations. But also on the table is a plan to increase the capital gains tax rate. That would be popular with the public but anathema to many conservatives, increasing the pressure for them to agree to a deal.

Simpson-Bowles: Another option, floated by outgoing Sen. Kent Conrad (D-N.D.), would be to pass an existing deficit reduction plan, most likely Simpson-Bowles, as a fallback. The idea would be to put in place a viable plan without forcing Congress to feel like it's voting for that plan to definitely take effect.

The problem is writing the plan, which requires answering the same questions as the larger deal. There is no bill version of Simpson-Bowles or Domenici-Rivlin or the Gang of Six plan that can be taken to the House floor. That's no accident. Simpson-Bowles, for example, doesn't commit to a particular rate schedule for taxes, instead proposing "illustrative" options but leaving the ultimate numbers open for negotiation. That makes it hard to use as a specific failsafe as Conrad proposes.

What's more, the one actually existing bipartisan debt bill doesn't stand much of a chance. Reps. Jim Cooper (D-Tenn.) and Steve LaTourette (R-Ind.) wrote a budget meant to incorporate features of the Simpson-Bowles and Domenici-Rivlin plans, but it got a measly 38 votes in the House. The other written-up budgets, like the White House's, the House Republicans' and the Congressional Progressives', don't stand much of a chance of being agreed to by both sides, even as a failsafe.

Tie it to GDP: This isn't actually a trigger of its own, but a good idea that could be added to any of the above trigger plans. Robert Reich, Bill Clinton's former Labor Secretary, has called for any deficit reduction plan's enactment to be tied to GDP growth, the unemployment rate, or some other measure of how the economy is doing. The idea is to prevent the dilemma that is now arising, where scheduled cuts are set to take effect when the economy is still weak.

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Ezra Klein | December 3, 2012