Wonkbook: Fiscal cliff offers and counteroffers

December 12, 2012

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Wonkbook's Number of the Day: 6.1, 12.9, 21, 59. Those are the percentages of the U.S. federal budget which the Government Accountability Office forecasts we'll spend on interest payments in 2012, 2020, 2030, and 2082, according to an opinion piece by Bruce Bartlett writing in The New York Times. Interest on the debt, Bartlett argues, is in fact a major driver of the long-term budget challenge. For more, see Wonkbook's opinions section.

Wonkblog's Graph of the Day: Unemployment benefits set to disappear.

Today in Wonkbook: the trade agenda; the austerity crisis; Medicare and Medicaid; money and the banks; and political climate change.

Top story: Offers and counterofffers, but few details

GOP poses second counter-offer. "The new GOP offer doesn’t represent major movement — Republicans are still offering $800 billion in revenue, which is $600 billion from the White House’s position. But it’s not clear what else was new in the Boehner offer to the White House." Jake Sherman and John Bresnahan in Politico.

Obama willing to do 'tough things' in exchange for taxes. "Sounding an optimistic note despite indications that talks to avert a series of tax increase and spending cuts remain at an impasse, President Obama predicted Tuesday that Republicans will eventually support extending current taxes rates for most Americans before the end of the year." Ed O'Keefe in The Washington Post.

Note: He pointedly did not rule out an increase in the Medicare eligibility age.

But we're no closer to any deal. "President Obama and House Speaker John A. Boehner were struggling late Tuesday to prevent negotiations over the deficit from breaking down after they traded proposals for averting the the year-end 'fiscal cliff' but made no progress toward an agreement. Obama telephoned Boehner (R-Ohio) on Tuesday, hours after receiving the speaker’s latest proposal for a deal on taxes and spending. The offer was virtually identical to the document Obama summarily rejected just one week ago, according to Republican aides." Lori Montgomery and Paul Kane in The Washington Post.

Question is: Can Boehner get the votes? "Democrats in the White House and Congress also say that they believe Mr. Boehner does hold greater sway among Republican colleagues than he did in the summer of 2011, his first year as speaker, given the chastening experience for junior Republicans of both last year’s budget fights and the 2012 election results." Jackie Calmes and Jonathan Weisman in The New York Times.

The sides are hundreds of billions of dollars apart. "The reality is the two sides are swapping proposals that do little but reaffirm the positions they’ve long held. And despite hopes for progress, the two sides seem to be diverging further, according to people involved in and familiar with the talks." Jake Sherman and John Bresnahan in Politico.

Wonkblog explains: Everything you need to know about Chained CPI in one post.

On the table: corporate taxes. "The White House has told Republicans it would include an overhaul of the corporate-tax code as part of any deal to reduce the deficit, people familiar with the talks said, putting a major priority for business groups on the table as part of the intensifying negotiations." Damian Paletta, Janet Hook, and Carol E. Lee in The Wall Street Journal.

...And so is the muni bond tax preference. " Both sides are willing to consider taxing at least a portion of municipal-bond interest paid to higher-income households...By exempting municipal bond interest from federal taxes, the government creates an incentive for investors to buy them, which helps hold down the borrowing costs of the states, cities and other entities that issue them. Curbing the exemption would likely reduce demand for the bonds, pushing those borrowing costs higher." John D. McKinnon and Andrew Ackerman in The Wall Street Journal.

Small businesses are freaking out about the fiscal cliff. Why that matters. "The National Federation of Independent Business index of small business optimism plummeted 5.6 points to 87.5, the NFIB said Tuesday morning. That brought the index to near its lowest levels in its 26-year history…[T]here are clear signs of the business sector holding back: Most notably, equipment and software spending by firms declined in the third quarter for the first time in nearly two years." Neil Irwin in The Washington Post.

KLEIN: The GOP's dangerous debt-ceiling gamble. "The political problem is that many Hill Republicans have convinced themselves that they’ll have the upper hand if they let the country topple fully or mostly over the cliff and then restart negotiations with a debt default looming in the background. They figure that although Obama really is willing to let the country go over the cliff, he’s not willing to let the country default and spark a global financial crisis. They are willing to do that, or they believe they can more credibly say they are, and that gives them leverage." Ezra Klein in The Washington Post.

SESSIONS: We can't fix the budget in secret. "Such change can begin only with extensive, messy and even contentious legislative work carried on for months in the open light of day. This is the exact opposite of the hidden negotiations to avert the so-called fiscal cliff. Washington has become possessed by the idea that a small group of negotiators, meeting in secret, can solve the deep, painful and systemic problems plaguing this country with a single 'grand bargain,' produced at the 59th minute of the 11th hour. This is a siren song." Jeff Sessions in The Wall Street Journal.

ORSZAG: How the fiscal cliff may unbuild America. "If you want a concrete example of the unanticipated harm that could come from the U.S. going over the fiscal cliff, look no further than Build America Bonds, an efficient alternative way to subsidize state and local investments." Peter Orszag in Bloomberg.

GLAESER: What the GOP ought to demand in exchange for higher taxes. "They might start by requiring cost-benefit analysis for any future federal spending on roads, bridges and other infrastructure…The Republicans should also demand consolidation of federal social policies. The U.S. has six large programs -- Temporary Assistance for Needy Families, Medicaid, food stamps, housing vouchers, unemployment insurance and the earned-income tax credit -- spread across four Cabinet departments and the Internal Revenue Service." Edward Glaeser in Bloomberg.

Music recommendations interlude: The Eagles, "Desperado," 1973.

Top op-eds

PRESCOTT AND OHANIAN: Taxes are much higher than you think. "Taking into account all taxes on earnings and consumer spending—including federal, state and local income taxes, Social Security and Medicare payroll taxes, excise taxes, and state and local sales taxes—Edward Prescott has shown (especially in the Quarterly Review of the Federal Reserve Bank of Minneapolis, 2004) that the U.S. average marginal effective tax rate is around 40%. This means that if the average worker earns $100 from additional output, he will be able to consume only an additional $60. Research by others (including Lee Ohanian, Andrea Raffo and Richard Rogerson in the Journal of Monetary Economics, 2008, and Edward Prescott in the American Economic Review, 2002) indicates that raising tax rates further will significantly reduce U.S. economic activity and by implication will increase tax revenues only a little." Edward C. Prescott and Lee Ohanian in The Wall Street Journal.

BARTLETT: The real long-term budget challenge. "That leaves interest on the debt as the principal driver of long-term spending and deficits. As the G.A.O. projections show, net interest rises from 1.4 percent of gross domestic product this year to 3 percent in 2020, 4.9 percent in 2030 and continues rising astronomically thereafter as interest accrues on the bonds previously sold to pay interest on the debt. Interest rises from 6.1 percent of the federal budget in 2012 to 12.9 percent in 2020, 21 percent in 2030 and eventually reaches 59 percent if current projections are maintained through 2082, the last year in the G.A.O. analysis. As a share of the deficit, interest would rise from 19.2 percent this year to 62 percent in 2020. In the long run, virtually all of the deficit is accounted for by interest on the debt." Bruce Bartlett in The New York Times.

MEYERSON: A place for the Michigan union. "What conservatives haven’t acknowledged, and what even most liberal commentators fail to appreciate, is how central the collapse of collective bargaining is to American workers’ inability to win themselves a raise. Yes, globalizing and mechanizing jobs has cut into the livelihoods of millions of U.S. workers, but that is far from the whole story." Harold Meyerson in The Washington Post.

Music recommendations interlude: Simon & Garfunkel, "Cecilia," 1970.

Medicare and Medicaid

Liberals: Leave Medicaid out of talks. "Congressional Democrats oppose almost all cuts to Medicare, Medicaid and Social Security, but they’re taking an especially hard line against Medicaid cuts, including proposals President Obama has supported in the past." Sam Baker in The Hill.

Study: Chronic illness on the rise in Medicare. "Rates of chronic disease are climbing steadily among Medicare patients, increasing healthcare costs and requiring more from hospitals, according to a new study. The American Hospital Association (AHA) used its findings to argue for higher Medicare payments to hospitals, which are caring for more sick seniors. The study found that conditions lasting three months or longer, such as obesity, diabetes and rheumatoid arthritis, have become increasingly common in the Medicare population over the last few decades." Elise Viebeck in The Hill.

PELOSI: No Medicare age changes, no how. "[T]he talks to avert the fiscal cliff, the idea of raising the Medicare age is central to the Republican proposal. There's just one critical problem: It doesn't work. It doesn't have public support. It's unfair. And it doesn't lower health expenditures. Such a proposal is a reflection of the broader Republican plan: an assault on the middle class, seniors -- and our future." Nancy Pelosi in USA Today.

CALSYN AND ROSENTHAL: Why raising the Medicare eligibility age is an awful idea. "[T]ens of thousands of low-income 65- and 66-year-olds, who would be cut off from Medicare—particularly the most vulnerable seniors living below the federal poverty level—will have nowhere to turn for coverage if their states reject the Medicaid expansion. Using 2011 census data to add to existing Congressional Budget Office calculations, we estimate that in a single year, almost 435,000 seniors would be at risk of becoming uninsured." Maura Calsyn and Lindsay Rosenthal in the Center for American Progress.

Political fashion interlude: On Frmr. Sen. Rick Santorum's sweater vests, "[h]is austerity message clearly applied to his own sleeves."

The trade agenda

A U.S.-E.U. trade deal? "The United States and Europe have flirted for years with the idea of taking the world’s largest trade relationship to the next level. With growth lagging on both sides of the Atlantic, the concept is getting a fresh look...By lowering costs for business, reducing import duties and further opening markets on both sides of the Atlantic, supporters say the benefits could be substantial -- adding close to a full percentage point to the 27-nation European Union’s gross domestic product, or about $150 billion. A study by Sweden’s National Board of Trade said trade between the two sides could jump 20 percent -- upward of $200 billion annually -- if an aggressive agreement were enacted, and perhaps far more than that." Howard Schneider in The Washington Post.

Meanwhile, how talks are going on an Asia-Pacific FTA. "U.S.-led talks in New Zealand on a free trade deal for the Asia-Pacific region have made some progress but have a long way to go to reach a pact to dismantle entrenched trade barriers by the end of next year, the negotiators said on Wednesday." Gyles Beckford in Reuters.

The U.S. trade deficit expanded in October. "The nation’s trade deficit widened in October as exports suffered the biggest decline in nearly four years, indicating that slowing global demand was spilling over into the nation’s already struggling economy. The Commerce Department said on Tuesday the trade gap increased 4.9 percent to $42.2 billion. In a sign of weak domestic demand, imports hit the lowest level in one and a half years." Reuters.

The American export machine took a blow. "Exports declined 3.6 percent, the most since January 2009…The value of exports dropped to $180.5 billion, the lowest since February, from $187.3, today’s report showed. Overseas sales of soybeans slumped by $1.13 billion during the month, and aircraft demand, which is also often volatile, decreased by $1.02 billion. Foreign purchases of engines, industrial machinery, petroleum products were among the other categories that also saw decreases." Lorraine Woellert in Bloomberg.

DUY: A disappointing trade report. "Today's international trade report confirms that sluggish global growth is taking a toll on the US economy. Exports are now barely up compared to last year...[E]ven a significant external shock does not necessarily induce a US recession. That said, the softer external sector does leave the economy more vulnerable to negative internal shocks." Tim Duy in Economist's View / Fed Watch.

Babies everywhere interlude: A real-time map of births and deaths.

Money and the banks

Economists disagree with Fed policy, in poll. "The Federal Reserve should stop buying bonds, even as the central bank is poised to purchase more, according to a narrow majority of economists in a new survey by The Wall Street Journal...In a survey conducted Dec. 7-11, just over 52% of economists said the Fed should stop buying bonds, with roughly 48% favoring continued purchases." Kristina Peterson in The Wall Street Journal.

The Fed has been discouraging bank mergers and acquisitions. "The Federal Reserve is pushing large U.S. banks to forget about all but the smallest acquisitions for a while amid a raging debate over the risk big lenders pose to the financial system...U.S. banks that hold 10% of all U.S. deposits already are banned from buying rivals in many circumstances…The acquisition ban is an informal part of a broad new regime by the Fed and other regulators that makes it increasingly unpleasant to be a large, sprawling bank." Victoria McGrane and Dan Fitzpatrick in The Wall Street Journal.

FDIC program extension in the works. "A bill extending a federal program guaranteeing deposits in noninterest-bearing accounts at federally insured banks easily cleared a procedural hurdle on Tuesday, setting it up for a vote on final passage later this week...The Senate voted 76-20 to continue debate on the bill, which would extend by two years a program created to help stabilize the banking system in the 2008 crisis. It was extended in 2010 until the end of this year." Edward Wyatt in The New York Times.

Fly me to the moon, let me play among those stars interlude: Paper planes from on high.

Political climate change

Sen. Boxer announces plans to form ‘climate change caucus’. "The move signals that Democrats might again be ready to aggressively promote bills to curb greenhouse gas emissions, even as the political prospects for global warming legislation remain remote in Congress." Ben German in The Hill.

Exxon: We're just kidding about that whole 'we support a carbon tax' thing. "A senior Exxon Mobil Corp. official said Tuesday that the oil-and-gas giant isn’t pushing for a carbon tax, but called it the best policy option if lawmakers were to impose a cost on emissions of greenhouse gases. The comments come as carbon taxes are receiving fresh attention in policy wonk and climate activist circles despite dim political prospects for enacting them." Ben German in The Hill.

Money-saving interlude: "Honey," a tool to automatically scan for working coupons online.

Et Cetera

The Atlantic's Molly Ball on how the gay rights movement planned and won its huge victories this year.

Interior delays ‘fracking’ rules. Ben German in The Hill.

Michigan enacts right-to-work law, dealing blow to unions. Michael A. Fletcher and Sean Sullivan in The Washington Post.

Why plans to split up votes by congressional district advantage Republicans. Brad Plumer in The Washington Post.

The White House can decriminalize medical marijuana in one easy step. Dylan Matthews in The Washington Post.

Childhood obesity rates falling in some cities. Sabrina Tavernese in The New York Times.

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

Wonkbook is produced with help from Michelle Williams.

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