Jonathan Chait

Can Obama Cut A Deficit Deal?

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It's starting to look more plausible that President Obama will try to cut a budget deal with Republicans. Bob Kuttner thinks Obama plans to spring a proposal in the State of the Union address:

The tax deal negotiated by President Barack Obama and Senate Republican leader Mitch McConnell of Kentucky is just the first part of a multistage drama that is likely to further divide and weaken Democrats.

The second part, now being teed up by the White House and key Senate Democrats, is a scheme for the president to embrace much of the Bowles-Simpson plan including cuts in Social Security. This is to be unveiled, according to well-placed sources, in the president’s State of the Union address.

Meanwhile, there may be some actual bipartisan support brewing, reports the Washington Post:

Fresh off an election in which the ballooning budget deficit weighed heavily on voters' minds, a hugebipartisan majority of senators agreed last week on a tax-cut package that would add hundreds of billions of dollars to the national debt.

But two of the 81 senators who backed that deal - Mark Warner (D-Va.) and Saxby Chambliss (R-Ga.) - want it known that bipartisanship isn't achievable only when everyone's getting a tax cut.

Chambliss and Warner are the leaders of a new, informal gathering of senators who have been meeting periodically since the summer to discuss ways to curb the deficit. The group includes more than 20 senators, with a roughly even partisan split. They have brought into their discussions high-profile guests, including Federal Reserve Chairman Ben S. Bernanke and former U.S. Comptroller David M. Walker.

What unites the group is the belief - shared by President Obama's bipartisan deficit commission - that there is no "silver bullet" to fix the country's fiscal woes.

"The way you do it is put everything on the table," Chambliss said Wednesday, appearing with Warner before a group of reporters.

"Put everything on the table" is code for a deal that includes higher revenue, thus violating the GOP's Prime Directive. I don't see how a deal like that could ever get through the GOP House, but the fact that Senate Republicans are even willing to engage a negotiation on such terms is significant. (Of course, Senate Republicans negotiated on health care reform and cap and trade only to melt away under pressure from the base.)

That said, it's worth thinking about what kind of deal Democrats should accept. I don't believe that Social Security cuts should be off the table. The question is what Democrats should demand in return. They are actually in a strong position. If the Bush tax cuts expire, it will basically solve the medium-term deficit problem. If Obama stands firm on the upper-income tax cuts, Republicans will block the middle-class tax cuts (which, for them, are just a loss leader to get tax cuts for the rich). That would take care of the medium-term deficit problem, as ending all the Bush tax cuts would save even more money than the Bowles-Simpson plan.

There remains a long-term solvency issue for Social Security, as well as the far more significant problem of explosive health care costs. The Affordable Care Act is a pretty strong start to clamping down on health care costs. Of course, the GOP's insistence on blocking implementation funds is a major barrier to solving this problem.

So where does that leave us? First, I don't think Democrats need to insist on tax hikes in return for Social Security cuts. They just need to preserve their ability to stand firm on the Bush tax cuts in 2012, and then actually stand firm on them. They do need to demand that Republicans give in on their insane desire to slash spending in the midst of the economic crisis, as well as their jihadist demands to defund the Affordable Care Act. Some kind of investment in physical infrastructure is needed -- this would be in keeping with a long-term wonk desire to shift the focus on government from promoting consumption to promoting investment.

So the outlines of a deal, to me, would be: Republicans agree to fund the government over the next two years without imposing cuts or defunding already-passed reforms, and to upgrade public infrastructure. In return, they get some long-term cuts in Social Security. This would be in keeping with the economic consensus in favor of short-term fiscal loosening and long-term fiscal tightening. Republicans would object to paying upfront for a deal where they don't see anything for many years, but the flipside would be that Democrats would trade away significant long-term changes in return for temporary policy. And then both parties fight over the Bush tax cuts in 2012.

I don't expect such a deal to actually pass. But if Obama can offer reasonable terms, he'll hold the public opinion high ground if Republicans walk away and threaten to shut down the government.

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