Is Obama’s plan better than going off the fiscal cliff?

December 20, 2012

The fiscal cliff negotiations are in a lull as House Speaker John Boehner tries to whip up support for his "Plan B" legislation, which would extend the Bush tax cuts for all yearly income under $1 million.


What are you up to, John Boehner? (J. Scott Applewhite, File/Associated Press)

Opinions differ as to why the Ohio Republican decided to call a time-out to try to pass a bill that Senate Democrats will dismiss and the White House will veto. One popular theory is that Boehner is trying to show his caucus that they have no choice but to come to a deal. Another is that he thinks the negotiations will fail and he's trying to win the post-cliff messaging war. A third is that, as happened in 2011, Boehner realized he can't sell a deal to his caucus, and he's trying to hide that failure in a distracting fight over "Plan B." A fourth is that he's trying to run out the clock, delaying a deal until after the Jan. 3 vote, when he'll be reelected speaker of the House.

Opinions converge, however, on the fact that this is a waste of time, and there's little hope of progress in the negotiations until it's played out. And by the time it has played out, there won't be much time for talks before we hit the fiscal cliff. By that point, it's pretty much going to be deal or no deal. 

And so, the lull in the talks offers both sides a moment to step back and try to think about this clearly: Do they prefer a deal along the lines of President Obama's last offer, or do they prefer no deal?

It's useful to begin by looking at how the negotiations have unfolded. Here, courtesy of Wonkblog's Dylan Matthews, are all the offers and counteroffers in one chart:

From their first offer to their last offer, the White House has dropped their ask on taxes by about $400 billion and raised their proposed spending cuts by $400 billion. Boehner has increased his offer on taxes by about $150 billion and dropped his spending cuts by $330 billion.

The White House has also moved from demanding a permanent resolution to the debt ceiling to asking for a two-year solution to the debt ceiling. "You can be sure congressional Democrats think the White House has gone as far as it should," Rep. Chris Van Hollen of Maryland told me. "You just can't keep rewarding this kind of behavior."

The White House largely agrees: They say they've gone pretty much as far as they can go. It's this offer, or something very close to this offer, or it's over the cliff. And so the question is, is this a good deal?

Taxes: The single most important fact of the fiscal cliff is that it's a massive, automatic tax increase -- more than $5 trillion over the next decade. Republicans hate that. The bulk of that revenue, however, would come from taxpayers making less than $250,000 a year. The White House hates that.

To prevent that broad-based tax hike, the White House is prepared to trade more than $5 trillion in automatic revenue for about $1.2 trillion in negotiated revenue. That's enough, alongside a nearly-equal number of spending cuts, to stabilize the debt for about a decade. It's not nearly enough to stabilize the debt -- or fund the government -- after that.

I want to be clear on this, so I'm going to repeat it: The level of tax revenues the Obama administration is seeking is not sufficient to fund the federal government in the long term. That's why the major fiscal commissions arrived at much higher tax totals: Simpson-Bowles had $2.6 trillion in revenue, and Domenici-Rivlin called for $1.6 trillion.

In a normal political system, where you could count on Democrats and Republicans to come together to make reasonable decisions on tax and spending policy in 2022, that wouldn't be much of a problem. Solving a problem for 10 years is pretty good!

In our political system, where one of the major party's primary commitments is no tax increases -- not ever? -- I worry about giving away so much automatic revenue for so little negotiated revenue. Future tax increases will have to come through legislation, and in recent decades, Democrats have not found that an easy feat.

That said, congressional Democrats often have trouble holding the line on taxes. The Senate bill that lets the high-income Bush tax cuts expire, for instance, was so compromised that it raised a bit more than $700 billion over 10 years, rather than the near-trillion dollars you could get from a cleaner expiration. So in a scenario where we go over the cliff, the White House has always worried that congressional Democrats would fold and accept far less than $1.2 trillion in revenues.

Health spending. The bulk of the spending cuts are going to come from health care generally and Medicare in particular. But we don't know much more than that. The specific cuts will largely be left to Congress to define.

I'm not against more Medicare cuts, at least in theory. Medicare pays for too much up-front; it doesn't negotiate with drug companies; and it asks seniors for too little (in my view, no one should be eligible for Medicare without first writing a living will). I supported the Affordable Care Act's changes, and I'd like to see Congress go further and include progressive cost-sharing and more aggressive price negotiating. All that has potential to bring costs down without hurting care. But there are plenty of cuts -- including increasing the Medicare eligibility age -- that have no prospect of reducing systemwide costs and will simply put health care at risk.

By contrast, cutting Medicaid would be a disaster. The program is already far cheaper than private insurance or Medicare, in large part because it pays providers so little. In addition, because Medicaid is a state-federal partnership, cuts on the federal level often shift costs to the state level. That's not a great idea under any circumstances, but it's a particularly bad idea at a moment when state budgets are strapped and governors are deciding whether to participate in the Affordable Care Act's Medicaid expansion.

In sum, Congress could choose to make smart reforms to Medicare and largely leave Medicaid alone. Or they could make a series of dumb and even counterproductive cuts to both programs. There's no way to evaluate this part of the deal because we don't know any specifics.

Chained-CPI: A modified chained CPI plan that includes protections for older and poorer seniors is not the worst spending cut in the world, nor the worst tax increase (Remember: Chaining CPI both cuts Social Security benefits and increases taxes). But nor is it the best. The appeal of chained CPI is its complexity, which allows politicians to pretend they're making a technical change rather than a real cut. This is a perverse approach to choosing deficit-reduction policies, and I'd like to see it stop. That said, I don't think chained CPI is a deal killer, so long as the most vulnerable are protected.

Discretionary spending: I'm much more worried about discretionary spending than I am about chained CPI. "Discretionary spending" is almost everything that's not Medicare, Medicaid or Social Security. It's education and research, infrastructure and the FBI, food safety and childhood nutrition. And it's been gutted.

The 2011 Budget Control Act cut this category of spending by well over $1 trillion, driving it to its lowest level as a share of GDP since 1962. Now the administration has proclaimed itself open to even more cuts in this area. "You can’t take more out of discretionary without doing real damage to the basic functions of government," says Bob Greenstein, president of the Center on Budget and Policy Priorities. "There’s no more room there."


NASA funding is in the discretionary budget, and it makes for better pictures than, say, food safety. (John Raoux / AP)

Stimulus: The most stimulative policy in the talks, the payroll tax cut, is permitted to lapse in Obama's latest offer. That's a huge blow to the economy. On the bright side, there's some infrastructure spending, an extension of unemployment insurance and, if I understand the deal right, it makes the extremely progressive tax cuts from the stimulus permanent. All in all, the stimulus in this offer is better than nothing, and it's far better than the contraction we'd face by going over the fiscal cliff. But it's not great.

The debt ceiling: Obama's initial offer included a permanent fix to the debt ceiling. This one includes a two-year fix for the debt ceiling. The White House says the length of the fix is immaterial: They will never, ever negotiate on the nation's borrowing limit again. Moreover, there's no way House Republicans will give up the debt ceiling forever in a legislative package right now. So, whether the temporary fix lasts two years, three years or five years is immaterial.

No cliff, little contraction: This deal, as Wonkblog's Neil Irwin has written, would hurt the economy, at least compared to a world in which we just extend everything. But it wouldn't do anywhere near the damage that going over the fiscal cliff for an extended period of time would do. And if we go over the fiscal cliff and then don't resolve it before we slam into the debt ceiling? The economic fallout would be devastating.


If we go over the fiscal cliff, a lot of people are going to lose their jobs. (Source: Congressional Budget Office)

Where does that leave us? I'm not exactly sure. I don't think Obama's latest offer is a great deal. There's too little revenue and too little stimulus. The spending cuts that are specific are dumb and the spending cuts that aren't specific could be dumb. The White House is very excited about "breaking" Republicans on taxes, but I don't see that as en epochal political change: The GOP will go back to being anti-tax jihadists the moment the deal is signed, and this strange legislative alignment in which doing nothing leads to huge tax increases won't repeat anytime soon.

But the question isn't whether the deal is optimal in an abstract sense. It's whether it's better than the alternatives. 

One alternative is to go off the cliff and stay off the cliff. But that would be unthinkably bad for the economy, particularly once we hit the debt ceiling in February.

The other alternative is to go off the cliff and use the pressure coming from the markets and the business community to negotiate a different deal with the Republicans. But that made more sense before the negotiations than it does today. 

It would be interesting if the White House made it clear that this is a onetime offer, meaning that if Republicans drive us off the cliff, the offer is off the table, and they won't accept anything less than, say, $1.5 trillion in taxes. But they're not likely to do that. If we go off the cliff and the Republicans get blamed and decide to fold, the White House isn't going to risk making themselves the bad guys by opposing their own offer. And even if they did risk it, congressional Democrats wouldn't hold the line.

For that reason, I think the likeliest alternative to this deal if we go off the cliff is...this deal, or perhaps something a bit worse. But it will be struck later, after we've done enormous damage to the economy.

If I'm right that the likely alternatives are this deal now or this deal, or something worse, later, after we've done terrible damage to the economy, I'd sure like to see it happen now. But perhaps I'm wrong. What's a plausible scenario in which we go over the cliff and end up with a much better deal?

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Dylan Matthews | December 20, 2012