The optimist’s view on the debt ceiling deal

Yesterday I presented a very pessimistic view of the debt ceiling deal and the “trigger” that would attempt to force the parties to come to an agreement to solve our debt problems. My reasoning was twofold: First, the trigger, which is supposed to be so terrible for both parties’ interests that it forces both parties to come to a compromise on fixing the debt, will only cut spending in the event a compromise isn’t reached. Since Republicans like spending cuts and Democrats don’t really, I reasoned that this trigger was unbalanced toward Republican interests. Secondly, this trigger couples its automatic spending cuts with the expiration of the Bush tax cuts. I believe this will give away Democrats leverage over Republicans when the Bush tax cuts come up for review and lead to the extension of all or most of the Bush tax cuts. (Again, more information can be found in the two posts before this one.)

The Super Congress will succeed where all other Congresses have failed?

Now, I would like to present the optimist’s view on the debt “trigger.” First, lets review the ground rules. The debt limit deal (passed today, Aug 2) creates a bipartisan “super committee” (or “Super Congress”–see right) which will take the next step of finding at least $1.2 trillion in additional measures to reduce the debt. If the committee reaches an agreement, its recommendations will be fast-tracked for an up-or-down vote in Congress. If it doesn’t reach agreement or Congress rejects its agreement, a debt “trigger” will kick in in Dec 2012/January 2013 which will make $1.2 trillion in automatic, savage cuts to the military, domestic spending and Medicare. Now, lets get into the political dynamics.

The Republicans on the super committee and the Republicans in the House who vote on the final package will be under enormous pressure not to accept ANY revenue increases as part of the deal. Their interest groups will tell them that they cannot close a single tax loophole, shutter a single corporate tax haven or raise rates one inch to raise revenue. That means that the only deal that is likely to be acceptable to Republicans is one that relies solely on spending cuts, and they are  unlikely to agree to anything else.

At  that point the Democrats on the super committee and in Congress might look at each other and say “so if we don’t reach an agreement with Republicans, there’s going to be $1.2 trillion in cuts, and if we do reach an agreement, there’s going to be $1.2 trillion in cuts, what do we  get out of this?” Then, Democrats will begin looking for the lesser of two evils:

  • The spending cuts in the debt trigger will be $600 billion from defense and $600 billion from domestic spending, including $200 billion from Medicare.
  • The spending cuts in a deal worked out with Republicans will not include nearly as much in cuts to defense (Republicans would never negotiate that much) and so will have to cut more deeply to Medicare and will likely cut Social Security and Medicaid as well. Certainly, Republicans will want something like $1 trillion of the cuts to come from domestic spending and entitlements.

Looking at those two options, its obvious which one the Democrats would prefer. If the choice for Dems is between two packages that are all-cuts and one cuts their priorities less than the other, that’s the one they’ll choose. Why should the Democrats negotiate for and sign off on huge cuts to their most cherished domestic programs when the trigger will only take $600 billion from domestic spending? Democrats would be better off refusing to play ball in the Republicans’ all-spending cuts game and insist on a balanced approach to debt reduction that includes higher taxes on the rich as well as decreased spending on the poor and middle class. Polls show that this is the approach favored by the American people.

When Republicans insist on cuts to very popular programs like Social Security and Medicare, while protecting rich people’s tax loopholes at all costs, Democrats will rightly refuse to go along with them. Democrats can then use Republican intransigence on taxes and their plans to gut popular programs against them in the 2012 campaign. This will help paint the Republicans as extreme and ideological while the Democrats come off as the party of moderation and balance.

This will also pit the Republican Party’s anti-tax base against its pro-military base in a veritable Republican civil war. The military contractors that donate hundreds of millions to the GOP will demand that the government increase taxes so that the military doesn’t go under the ax, while the anti-tax Tea Party will stick with their no-tax pledge and infuriate Republican hawks by standing by as the military is decimated.

All this may lead to the inevitable: the Republican Party (or at least parts of it) admitting that revenues have to rise in order to solve our debt problem.

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