November 1, 2014

We Need Less Bombast and More Breathing Room

We will soon see whether there is any remaining capacity in the U.S. political system to reach compromise across partisan lines for the common good.

Republican congressional leaders say that if President Obama wants the government to reopen and the debt limit to be increased he will have to make concessions on spending and agree to negotiate a long-term deficit reduction deal. Obama says he will not negotiate anything until the debt limit is raised and the government reopened. After that, he’ll talk.

If neither side blinks, the government will remain shut and nation could begin defaulting on a portion of its obligations within a matter of days..

That disastrous outcome must be avoided. But how?

Backing down now would be politically perilous for either side. Failing to back down, however, would be perilous for the economy, the nation’s creditworthiness and the trust that citizens place in elected leaders to carry out the most basic functions of government.

Surely, both sides know that ultimately two things have to happen.

1.) The debt limit must be increased. There is no realistic alternative and any set of fiscal options, even Paul Ryan’s austere House Budget Committee plan, would require additional borrowing.

2.) There must be a meaningful negotiation over fiscal policy in which both parties make some concessions. Neither party has the votes to force through its own agenda.

Obama and the Republican leaders should start by reaching a tacit understanding that neither will insist that the other must publicly back down as the price of a deal. What’s needed now is less bombast and more breathing room.

An immediate suspension of the debt limit -- even if temporary -- and the reopening of government agencies at current-law spending levels would be a reasonable place to start. Enough time must be provided for a broader agreement to be reached. Absent a total abdication of legislative duty (and competence), the details should not be difficult to work out.

They could then begin to discuss three key items that have the potential for bipartisan support: additional Medicare reforms that reduce projected spending, tax reforms that target wasteful subsidies, and a new set of spending caps to replace the “sequestration” caps that were never intended to actually go into effect and that neither party fully supports.

Democrats and Republicans alike have expressed a willingness to consider these basic elements, although disagreements remain on the specifics. Resolving such disagreements, however, is what the discussion should be about.

A useful framework for beginning the discussion is the plan suggested by Alan Simpson and Erskine Bowles in April: A Bipartisan Path Forward to Securing America’s Future.

The major categories of savings in this 10-year framework include $585 billion from changes in Medicare and Medicaid, and $585 billion from tax reform that would reduce subsidies (i.e., “tax expenditures”) and lower rates.

Simpson and Bowles call for another $266 billion in savings from other mandatory spending programs such as farm subsidies ($40 billion), education subsidies ($35 billion), and government employee benefits for health care and retirement ($100 billion).

Discretionary spending, including defense, would be reduced by $385 billion although the further cuts imposed by the current “sequester” would be replaced.

Their plan would also adopt a better government-wide measure of inflation (“chained CPI”), thought by many economists to be more accurate than the index that is currently used.

This switch, which Obama and many Republicans support, would save an estimated $340 billion through 2023. To protect low-income and elderly individuals, some of that could be set aside to give a flat dollar increase to beneficiaries of Social Security, Supplemental Security Income (SSI), and veterans assistance who have been receiving benefits for 20 years.

Changes could mostly be phased in to avoid a sharp economic contraction. Simpson and Bowles estimate that 95 percent of the deficit reduction in their plan would occur in 2016 and beyond.

Hard-liners of both parties would no doubt find elements of the above that they disagree with. However, trying to satisfy the hard-liners will make any agreement impossible.

If a compromise agreement could be reached, even one short of the Simpson-Bowles savings targets, a larger debt limit increase could be added on.

Obama could claim that the budget agreement had nothing to do with the debt limit and Republicans could claim that it did. It makes no difference. The main point is to find a way to defuse a needless crisis and move forward towards a more sustainable fiscal policy.