The Four Big Problems With — And Four Silver Linings Around — The Debt Limit Deal

The Four Big Problems With — And Four Silver Linings Around — The Debt Limit Deal

Brian Beutler

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SILVER LININGS

Backloaded

Most economists would agree, now is a bad time to cut government spending. We're already seeing the contractionary effects of the end of the stimulus, and this just reinforces those. The good news is that the near term cuts are quite small. Only about two percent of the nearly $3 trillion in savings outlined in this plan occur in the first year, and they don't all come from social programs. They also come from defense spending and other domestic programs. So its near-term impact on the economy will be pretty small. Of course, if the economy doesn't recover soon, the out year cuts will turn out to be very painful.


Enforcement

As explained at length on Sunday, most of the projected savings from this plan will come from a new Congressional committee, tasked with finding at least $1.2 trillion in deficit reduction, either from entitlement cuts, or tax increases or both. If that committee gridlocks, or Congress doesn't pass its recommendations, or President Obama vetoes that package, it will trigger automatic, broad cuts to both defense and domestic spending. Most of that will come from defense spending and from Medicare providers. The bad news is, there's no tax revenue in the triggers, so no guarantee anywhere that the truly wealthy will have to contribute to deficit reduction. The good news is, the breakdown of this enforcement mechanism is fairly progressive, given that it's all cuts. It amounts to a two percent cut for Medicare providers, and a whopping $500 billion in defense cuts over 10 years. Programs for the poor and for veterans and Social Security and Medicaid are all cordoned off. The added bonus here is that means influential defense hawks, and the interests that back them, will do whatever they can to force the committee to pass a bipartisan fiscal plan, even if it means picking a fight with anti-tax Republicans. The other added bonus is that these "sequestered" cuts won't take effect until 2013 -- the same time the Bush tax cuts expire.


The Bush Tax Cuts

This plan contains zero guarantees that taxes will be raised -- more on that below. But it's unexpectedly compatible with the White House pledge to let at least some of the Bush tax cuts expire, particularly those benefitting the most wealthy. Here's why: when the new fiscal committee convenes, it will have free reign to look at both entitlement cuts and tax increases. The problem with a lot of tax increases is that they're scored by the Congressional budget office against "current law," which assumes the expiration of all the Bush tax cuts. So if the committee tried to end the tax cuts for the top earners, but make the rest of them permanent, it would score as a big tax cut and thus a budget buster -- not something a deficit reducing committee will want to touch. But that means the committee will have to look at other revenue raising options -- loopholes and expenditures that have nothing to do with the Bush tax cuts, say, or a new millionaire's tax bracket. But that also means the Bush tax cuts will survive this process in a way that almost guarantees they'll be set to expire at the end of 2012. That gives Democrats a lot of leverage if they want to pick a fight over those cuts with Republicans. History suggests they'll chicken out. But perhaps they won't.

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PROBLEMS

Domestic discretionary cuts

The first part of the budget to take a hit -- and which will be hit for at least a couple years into the future -- is the one part of the budget that hasn't grown particularly fast. And it's also the part that does the most for regular people. Health programs, education, clean energy, and transportation. It will be cut and capped, in a way that the Congressional Budget Office forecasts will amount to hundreds of billions of dollars less spending for these crucial programs.

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Obama has one golden ticket out of the revenue dilemma. As I’ve written multiple times, the expiration of the Bush tax cuts gives him enormous leverage over the GOP. Republicans signaled last year they’d rather kill off the entire Bush tax cuts than sacrifice the portion that only benefits the rich. Holding firm on the Bush tax cuts would let Obama maneuver Republicans into the position of killing off all the Bush tax cuts. That would provide all the revenue he needs – some $4 trillion over a decade, as opposed to the $800 billion he’d raise merely by ending tax cuts for the rich.

What’s more, going to the mat over the Bush tax cuts would provide Obama with a strong political message for 2012. He can’t run on the economy. He needs a contrast election. Republicans will try to pass some version of the Paul Ryan budget, cutting taxes for the most affluent and laying waste to Medicare and Medicaid. Obama can run as the candidate insisting on shared sacrifice – and having already agreed to $3 trillion in spending cuts would give him credible to draw that line.

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