As the budget summit reconvenes this week in the seclusion of Andrews Air Force Base, the Mideast crisis has helped replace dreams of a historic deficit-reduction deal with the more achievable goal of just getting by.
Talk of deadlock and shutting down the federal government under sequestration has given way to optimism that the policy makers will take the easy way out. There is broad agreement that the first-year deficit-reduction target will be cut from $50 billion to $20 billion. That means President Bush could make do with his budget's original projection of $14 billion in additional revenue. He then would have broken his no-tax-increase pledge in word but not in deed.
Included in the $14 billion is $4.9 billion that the administration guesses would flow from a capital-gains rate cut, a proposal that Democratic summiteers candidly tell us is unacceptable "ideologically." Herein lies the major decision by the government on how to shape the nation's economic policy. It is not necessarily tied to a budget deal and may well be decided independently of it.
This is not the scenario envisioned by Budget Director Richard Darman, the administration's master strategist. From the start, he recognized that an abandonment of Bush's 1988 campaign no-tax-increase pledge would cost the president and his party dearly and would be acceptable only if it resulted in major budget reforms that at long last brought the spending process under control.
But when Congress quit for its August recess, the summit was deadlocked with prospects for angry words rather than agreements. Simultaneously, the president promised to start bashing Democrats for not negotiating in good faith, and House Minority Whip Newt Gingrich prepared to trek into the wilderness and repudiate the president's budget strategy.
But Iraq's guns of August stilled Washington's mouths of August. Bush's promised excoriation of Democrats was reduced to part of one press conference (not attended, it was widely noted, by Darman). Gingrich's break with the administration was consummated in a single day's visit to Washington, largely drowned out by war drums.
While voices were lowered, oil prices were raised. The spike transformed chances of recession from possible to nearly certain. Lowering the Gramm-Rudman deficit targets to avoid sequestration became a requirement, not an option.
The official position by Darman is that the $50 billion first-year reduction goal is unchanged, but Democratic summiteers say they have been informed by the budget chief that $20 billion will be okay. That change makes the probable end product a workaday affirmation of the status quo rather than a deal of the century. Some Republican congressional negotiators will insist on $50 billion to reassure markets (disclosing a belief that a $30 billion change in estimates will convulse a $4 trillion economy), but they will not get far.
What will have far greater impact on the real economy and financial markets than micro-managing the deficit is the fate of capital gains reduction. Senate Majority Leader George Mitchell has drawn a line against it unless upper-bracket income tax rates are raised. Since that deal is unacceptable to the administration, the budget agreement is not likely to change capital gains rates.
But Gingrich is leading the way for a tax-reduction package, crowned by capital gains, to promote growth that could be passed independently of the budget deal. It would have been enacted last year had it not been for Mitchell's skillful use of procedural ploys to thwart the will of the majority in both houses of Congress.