The ‘grand bargains’ that aren’t

June 21, 2011

I used to know what people were talking about when they called for a “grand bargain” on the deficit: Democrats would give in on spending cuts, and Republicans would give in on tax increases. Today, we’re on the verge of a couple of grand bargains. But whatever the Republicans are giving in on, it isn’t taxes.

The first grand bargain will come by August, when the clock strikes midnight on the debt ceiling. Insiders in both parties think they have a good sense of what that deal will include: about $2 trillion in deficit reduction over the next 10 years, almost all of it from spending cuts, plus an agreement on a budget path for the next decade and a policy that makes deep, automatic cuts if we’re not hitting our deficit-reduction targets by 2014. But what’s the bargain here? Democrats give in on spending cuts and Republicans give in on not destroying the nation’s credit?

The second deal will come in 2012, when the Bush tax cuts are set to expire. The tax cuts, which cost $2 trillion over the past decade and will cost an additional $4 trillion over the next decade, have done more than any policy initiative in the past decade — including the wars and the stimulus — to turn the surpluses of the ’90s to the deficits we face today. If you let them expire, the national debt stabilizes until well into the 2020s.

But we’re not going to let them expire. The Republican Party wants to extend all of the Bush tax cuts and the Obama administration wants to extend most of them — the exception being the cuts for income over $250,000. If all goes as the Democrats hope — and when does that happen? — the bargain here will be that they’ll agree to make more than $3 trillion in tax cuts permanent if Republicans agree to drop their demand to make more than $4 trillion in tax cuts permanent.

The third deal is likely to come in 2014, when the enforcement mechanism Congress passed in 2011 threatens to make deep, automatic cuts. The optimistic souls on the Democratic side see this as the deal where they’ll get some new taxes and those on the Republican side see it as the deal where they’ll make structural, Ryan-esque reforms to entitlements.

I suspect that both sides are wrong. But the optimism of the Democrats is particularly odd. What incentive will the Republicans have to come to the table at all if they get sharp cuts and limits on domestic spending this year, the permanent extension of most or all of the Bush tax cuts next year, and they’re facing automatic spending cuts in 2014?

The Democrats, if you challenge them on this, don’t necessarily disagree. But what’s the alternative, they ask, let the debt ceiling cave in and the economy go into a tailspin? The Republicans might be willing to take that risk, but they’re not. They control the White House and the Senate. They have to be responsible. Be the grown-ups. Govern.

That’s true. But it’s created a fundamental imbalance in American politics: There’s never a good enough reason for the Democrats to say no, or for the Republicans to say yes. And letting that dynamic persist is not responsible either. Eventually, this White House has to figure out how to make Republicans say yes.

The administration often feels unfairly criticized by observers who demand that it get things done and then assail the compromises necessary to getting things done. Sometimes, it’s true the naysayers are being unrealistic. Health-care reform would not have passed with the public option, and there were never anywhere near the votes needed to break up the big banks. When both sides don’t want to get to “yes,” the White House often has little leverage.

But that excuse is overused at 1600 Pennsylvania Ave. Sometimes, the two sides do need to get to “yes.” That was the case with the 2010 expiration of the Bush tax cuts, and the White House smartly negotiated a substantial round of stimulus in return for a temporary extension of the tax cuts.

It’s also the case now. Republicans need an increase almost as much as Democrats do. There are irresponsible elements within the party, but the GOP’s leadership does not want an economic catastrophe, and they need a deficit deal that lets them move past Paul Ryan’s unpopular budget proposal.

Democrats are still likely to end up with a deal they don’t really like, but they should at least hold fast to some bottom lines. First, no enforcement mechanism that isn’t equally divided between automatic spending cuts and automatic tax increases. Both parties need a reason to return to the table.

Second, if the GOP won’t budge on raising taxes in this deal, then they need to budge on cutting taxes to provide the economy with more stimulus: The payroll cut they agreed to in 2010 should be kept for another year, and extended to employers as well as employees. And finally, fantasies about 2014 aside, the expiration of the Bush tax cuts is the administration’s only real shot to make revenue a serious part of the deficit solution. Extending everything in 2012 but the breaks for the very rich isn’t good enough.

Will the political team like arguing for some taxes on some people who aren’t clearly rich in an election year? Will the economic team like saying “no” with the nation’s credit rating hanging in the balance? Of course not. But taking risks is part of being responsible, too.

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