Getting to yes on budget: For better answers, ask different questions

Steven Pearlstein
Columnist November 24, 2012

Here they go again.

It took only a couple of weeks, but already the glow has begun to wear off those post-election promises to put ideological and partisan differences aside in order to reach a grand bargain on the budget in time to avoid sending the economy over the “fiscal cliff.”

Steven Pearlstein is a business and economics columnist who writes about local, national and international topics. View Archive

It tells you everything you need to know about the intransigence of the political class that has spent much of the past two weeks arguing whether the expiration of tax cuts and the onset of deep and indiscriminate spending cuts constitute a “cliff” or a “slope” or a series of “plateaus.”

Rather than coming up with fresh, concrete approaches for raising revenue or slowing the growth in entitlement spending, the same old partisans are hard at work redrawing the same old lines in the sand, justifying them with the same old exaggerated nonsense about the economic and social calamity that will result from conceding even one inch of sacred policy ground.

The generous view is that this is merely posturing to secure advantage in the inevitable compromise. The more realistic one is that these political Bourbons have learned nothing and care only about winning and protecting their own selfish interests over the common good.

Take the Holy War over what marginal tax rates should be assessed on households with incomes over $250,000. House Republicans insist, above all else, that those rates remain at a Bush-level 35 percent. The President and House Democrats insist, above all else, that rates rise as scheduled Jan. 1 to the Clinton-era 39.5 percent.

You might ask yourself what is so sacred about a 35 percent, or a 39.5 percent, tax rate? Nothing, it would appear, other than the fact that politicians have invested so much ego and political capital in defending them, and the near-certain prospect that numskull commentators and special-interest groups will use them in assessing which “side” won and lost.

If there is need for more federal revenue (as most experts agree there is), and if it is reasonable to ask high-income households that have done well in recent years to assume a larger share of that tax bur den (as most Americans say they prefer), there are lots of ways to raise it without seriously harming the economy.

You could limit in some way the benefit of deductions and credits, or eliminate some of them. Or raise the tax rate on dividends and capital gains from the current level of 15 percent. You could set higher tax rates but only for incomes above $500,000, or $1 million, or $10 million. Or impose a minimum effective tax rate, regardless of the source of the income or how it is spent.

And if some combination of those changes did not raise sufficient revenue, you could even raise the top rates by a percentage point or two while exempting profits of small businesses that are reinvested in the enterprise.

But instead of focusing on such alternatives, the crusaders of the left and right remain stuck in their stale, silly contest to make the other side surrender, as if the future of American capitalism and the American way of life somehow hinges on the outcome.

The same instinct for symbolism over substance prevails in the debate over how to rein in the growth in spending.

Democratic leaders in the House and Senate have once again declared that Social Security reform is “off the table,” despite projections that the system will be unable to pay all promised benefits starting in 2035. A succession of blue-ribbon commissions has identified the obvious fixes: reducing benefits and cost-of-living increases for wealthier seniors, tying the retirement age in some fashion to life expectancy, combined with an increase in the income that is subject to the Social Security tax. But Democratic leaders vow to oppose them all — except, of course, the payroll tax hike on upper-income households. Just as opposing tax hikes is central to the Republican brand, protecting entitlements is seen by Democrats as central to theirs.

Not that anyone is talking about cutting — just limiting the growth in entitlement spending. But in the symbolically driven budget debate, any reduction in the growth of spending from that unsustainable trend is denounced as a cruel “cut,” even if it is simply limiting annual Social Security increases to well-off seniors or eliminating unnecessary tests and procedures under Medicare.

As Democrats well know, Social Security and Medicare are pay-as-you go social insurance programs, financed by current workers through payroll taxes for the benefit of current retirees. That worked well when there were as many as four or five active workers for every retiree. But now that the ratio of workers to retirees has been cut in half as a result of an aging population, there is no way those programs can continue to grow at the same rate, with the same retirement ages, without a massive transfer of income from young to old. The greedy geezers at the AARP are desperate to muzzle any such discussion, and Democrats remain only too eager to oblige.

Not that Republicans have been any better. Although they talk a good game about shrinking government and cutting spending, Republicans have yet to put forward a credible plan detailing which programs and benefits they’re willing to cut. And like Democrats, their preferences are driven more by symbolism than political or economic reality. It is worth noting that many of the same Republican leaders who push so hard for reductions in what they view as wasteful spending for domestic programs by self-serving bureaucrats also take the view that everything done by the Pentagon and other national security agencies is vital and every dime is spent efficiently. Nobody who is serious about budgets or government really believes that.

The underlying problem with the budget debate is that it is framed in terms of current levels of spending and taxes and the symbolism that has grown up around them — a framing that has led to the stalemate.

James Sebenius, who heads the Harvard Negotiation Project at the university’s business and law schools, says one way to overcome such stalemates is to reframe the debate in ways that allow negotiators to circumvent the “red lines” and reduce the importance of symbolic hurdles. That often requires negotiators to expand the number of issues so that the calculation about who wins and who loses becomes less clear and straightforward. The aim, Sebenius says, “is not to force an overt compromise as much as it is to invite a reinterpretation of interests.”

In the case of the budget talks, I would imagine that would involve framing the outlines of a grand bargain in broader strokes by setting long-term targets for taxes, spending and spending categories in terms of a percentage of gross domestic product. There might be an agreed-upon benchmark for the progressivity of the tax system or Social Security. Growth in health-care spending could be tied to growth in income. Formulas could be revised for cost-of-living increases or for the ratio of benefits to cash compensation for federal workers. Taxes could be set in terms of minimum effective rates for each income category rather than maximum marginal rates.

The idea would be to reframe the negotiations according to criteria that matter most to people and to the performance of the economy, rather than according to a set of political and ideological benchmarks. Negotiators would be freed from the straightjacket of what exists today, allowing them to start from where they think things ought to be 10 or 20 years into the future, and work backward from there.

The trick to breaking the budget stalemate isn’t getting the sides to change their answers to the same old set of questions. The trick is to get them to agree on a new set of questions.

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