The Budget Deal Emerges

by Jonathan Chait | May 5, 2011

Two reports out this morning suggest a budget deal is coming into focus -- not a long-term grand bargain, but something that Republicans can agree to in return for lifting the debt ceiling. The Washington Post last night reported that Republicans are willing to take the Medicare part of their budget off the table and make a deal on the rest of the domestic budget:

Senior Republicans conceded Wednesday that a deal is unlikely on a contentious plan to overhaul Medicare and offered to open budget talks with the White House by focusing on areas where both parties can agree, such as cutting farm subsidies.

On the eve of debt-reduction talks led by Vice President Biden, House Majority Leader Eric Cantor (Va.) said Republicans remain convinced that reining in federal retirement programs is the key to stabilizing the nation’s finances over the long term. But he said Republicans recognize they may need to look elsewhere to achieve consensus after President Obama “excoriated us” for a proposal to privatize Medicare.
That search should start, Cantor said, with a GOP list of proposals that would save $715 billion over the next decade by ending payments to wealthy farmers, limiting lawsuits against doctors, and expanding government auctions of broadcast spectrum to telecommunications companies, among other items.

The Wall Street Journal reports that the deal may involve setting some kind of targets that require automatic cuts if not met:

Mr. Ryan's outline is strikingly similar to those administration officials have been using privately, an indication that any compromise is likely to include the elements he described:
• Cuts or mandated limits on government spending programs that must be approved each year, such as for defense programs and regulatory agencies. This type of expense accounts for 39% of current federal spending.
• Cuts or limits on so-called mandatory spending, such expenses for farm subsidies, food stamps, federal employee retirement, student loans and housing subsidies that don't require yearly appropriations. Mr. Ryan suggested a deal could exclude, for now, the biggest of these expenses: Medicare and Medicaid health insurance programs and Social Security.
• Targets that would aim to bring the deficit below 3% of gross domestic product by 2015, a goal that would require more spending cuts or tax increases than the legislated cuts would achieve.
• To enforce the targets, automatic and credible spending cuts would be required if the Congressional Budget Office says policies in place won't meet those goals; the administration wants both automatic spending cuts and tax increases.
Republicans would then be free to tell voters they can reach those goals in the coming years almost exclusively by cutting spending on benefit programs. Democratic candidates could argue that some tax increases, particularly on upper-income Americans, also are needed to close the budget gap.

It's interesting that the Republicans are blinking. I suspect two factors are at work: they're getting hammered on Medicare by voters, and on the debt ceiling by business. They need a deal that allows them to reassure business that they won't play chicken with the debt ceiling and that minimizes the exposure of their most vulnerable members on Medicare, where they've been defending a wildly unpopular position. This deal would seem to put the Ryan budget on the back burner.

So we're looking at a combination of cuts that both parties can agree on right now, along with limits on the deficit that require some kind of automatic cuts (or cuts plus higher revenue.) The enforcement mechanism is always the rub.

Now, I think the notion of cutting the deficit during a period of mass unemployment stemming from the greatest economic crisis since the Depression is daft. But if you take this fiscal insanity as a given, then working within those parameters, this seems like a fairly sensible approach. I don't think it's very likely we get a grand deficit bargain without resolving the twin issues of who will be president and what will happen to the Bush tax cuts. Once we have those answers -- that is, after November 2012 -- then both parties will be working off shared assumptions. Then, if there truly is some bipartisan consensus on reducing the deficit, a deal might be workable. This agreement will serve the purpose of minimizing the risk of a credit market meltdown between now and then.

Source URL: http://www.newrepublic.com//blog/jonathan-chait/87937/the-budget-deal-emerges