Chris Weigant: The New Deal

Lest F.D.R. rise up from his grave and begin to haunt me, allow me to begin by putting that headline in the proper context. Correct capitalization should really be “the new deal” — so as to not cause confusion with historical references. The words are capitalized above merely because they are in a title, and for no other reason.

By this point, even “scare quotes” are not necessary for talking about the upcoming fiscal cliff. The term has been repetitively bandied about in the media world so thoroughly that it is (at least for the time being) self-evident. However, what is lacking from the inside-the-Beltway crowd is some sort of snappy moniker for the (lower-case!) new deal that Congress and President Obama are now working towards. Whether the deal eventually happens or not, it’s time to give it a name. I’m going to begin using a rather mundane name for this deal, in the hopes that it goes viral: the “Grand Bargain II” or (for those with an itchy Twitter finger) “GB2.” The original “Grand Bargain,” a year and a half ago, did not actually happen between John Boehner and the president but it got named all the same, so I think it’ll be fine to just recycle it. But I do not write today merely to speak of political branding. Just wanted to get it out of the way so I have something to use for the rest of this article, that’s all.

Instead of focusing on whether a GB2 deal will be struck between Obama and the House Republicans, or even when such a deal might be finalized, I think far too few pundits are focusing on what the deal might contain. So I thought I’d peer into my cracked and foggy crystal ball and make an attempt at predicting which way the GB2 chips are going to fall. Please note, though, that I’m not endorsing (or condemning, for that matter) any of the following outcomes, I’m just attempting to read the political language emanating from the principal negotiators involved and draw some likely conclusions of what is likely going to be in such a deal. With that caveat firmly in place, here’s how I see things working out.

 

Sequestration

This is really the gorilla in the room that everyone seems to be ignoring. While there is much talk of taxes and entitlements, few are addressing the budget-cutting trigger which was the only pathetic result of the earlier congressional “supercommittee.” These cuts are known in Washington-speak as “sequestration.”

I’m predicting that this can is going to be kicked down the road (in some fashion or another) to the incoming Congress. While some spending cuts may be part of GB2, most of the military and social program cuts (other than entitlements, which I am addressing separately, below) will quietly be shelved for a period of months, if not a full year. Oh, sure, there’ll be talk of “triggers” and dire consequences, but my guess is that they’ll be about as substantial as swamp miasma.

Both parties will decide that punting on the sequester cuts is the right thing to do politically, and they will hand the problem off to the next Congress. Which will bring up talk of a “Grand Bargain III,” of course, but we’re getting ahead of ourselves.

 

Debt ceiling

This is a much more immediate problem. President Obama and the Democrats obviously want a debt ceiling raise to be part of the GB2 deal. Republicans, equally as obviously, do not. The reason Republicans are fighting against it is that they know that it’ll just force all the budgetary issues to be discussed all over again in the next few months. The debt ceiling will officially be reached some time around the first of the year, but with Treasury accounting tricks, the real crisis won’t hit for at least a month or two down the road. Republicans will want another bite at the budget apple after GB2, because they think they will have more leverage in this fight.

They’re right, too. Right now, if Congress does nothing, the Bush tax cuts (more on them in a moment, too) will go up automatically — which gives Democrats lots of leverage to get something done. But with the debt ceiling, if Congress does nothing, then Obama will (the Republicans figure) be the one to pay a political price. Whether they’re right or not, it’s hefty political leverage to wield.

But I remain optimistic. Obama is going to use a giant threat — in private, most likely — to force the Republicans to accept a debt ceiling hike. The president will calmly explain to the Republican leaders that have two — and only two — choices: either raise the debt ceiling as part of GB2, or Obama will personally declare the debt ceiling itself null and void and utterly meaningless (using what has been called “the Fourteenth Amendment option”). So Congress can either raise the debt ceiling as part of the deal, or the entire issue will be taken away from them permanently. Republicans may seethe (this is why this bargaining chip will likely be played in private, to allow Republicans to save face in public), but they will in the end swallow this pill. The talking point from the White House will be: “We’re not going to do this all over again, a month from now.”

 

Taxes

There are quite a few details in the tax portion of the fiscal cliff. Most of the attention has been on the Bush tax cuts expiring for the wealthiest earners, but there are a lot of chips to bargain with that haven’t received as much media or public attention.

The Alternative Minimum Tax problem will be solved — but only short-term, for a year or possibly two. This is an enormous lie that both parties are complicit in foisting on the public, for the purposes of making the 10-year budget deficit projections look much smaller than reality. Neither side’s going to want to open up this can of worms. Instead they will both agree to do what they always do on the issue — fix it for a year, and kick the can down the road one more time. This is a shame, because honestly fixing this tax would truly be the way to solve the problem of taxing upper-income folks fairly. But it’s not going to happen.

One big victory for Republicans will be raising a tax (yes, you read that correctly). For the past two years, Obama has gotten a “payroll tax holiday” for all American workers which (unless you make six figures a year) has meant an automatic two percent raise in your paycheck. This is going to end on New Year’s Day. Even though it is a tax cut for everyone, Republicans hate it because Obama’s for it (that’s as near as I can figure), so Obama will allow them to claim victory on the issue. This will mean the “holiday” will be over, and everyone will get hit with a small tax hike beginning immediately.

What Obama will get out of this phase of the bargain will be the continuation of all the minor parts of the “Bush tax cuts” — increased credits and deductions, for instance. These may be limited to those making under $ 250,000 a year, but they will continue. The other thing Obama will get is a big rise in the estate tax (what Republicans call the “death tax”) — which was one of the gifts Bush gave to the stratospherically-wealthy in his original tax cut package. Estate tax rates will go back to what they were under Clinton. Taxes on dividends could go either way. If the Bush tax cuts expired, taxes on dividends would go up by five percentage points. If this tax break is continued, it may be phased out for the over-$ 250K folks.

The big question on taxes, however, is what to do about the Bush tax rate cuts. This is currently the central part of the argument, at least in the media. Obama wants the Bush tax rates to continue for 98 percent of earners, and have the top two percent revert to the Clinton-era rate. Republicans seem adamant about not raising anyone’s tax rate, and instead limiting deductions and loopholes for the wealthiest earners.

The 98 percent will be taken care of — that’s as close to a sure bet as you can make about GB2. Whether it happens before or after the first of January is still an open question, but when the deal is struck, it will continue the Bush tax rates for everyone’s income, up to $ 250K.

Both sides in this fight have drawn rather bright and well-defined lines of battle. Obama has repeatedly issued veto threats for any bill which does not raise tax rates on the top two percent. Republicans have made what Harry Reid calls “happy talk” about “raising revenues,” but they appear to have dug in their heels on “raising tax rates.” Especially in the House. This is going to come down to the question of what John Boehner can sell to enough House Republicans to pass a bill. I could see a compromise being worked out on this one, something along the lines of “the tax rate for the top incomes will rise — but not up to where they were under Clinton — while deductions for the over-$ 250K set will be limited in some way.” There’s going to be some awfully creative accounting on this question, no matter how it gets resolved — that’s my guess. This way, both sides will be able to claim minor victories on the issue to their base.

 

Entitlements

Republicans are pushing hard for large cuts to the big three social programs — Medicare, Medicaid, and Social Security. Democrats are pushing hard to exempt all three from any cuts whatsoever.

Social Security will not be touched. This round goes to Obama. If it changes at all, the only change will be raising the “cap on earnings” far above where it stands now (only roughly the first $ 110,000 anyone makes is taxed currently — which is an enormous tax break for the wealthy, right there). However, I don’t really expect even this to change. Obama will stand firm on Social Security, and Republicans will give up fighting on the issue.

Medicare and Medicaid are another story, however. Chuck Obamacare into that category, as Republicans are insisting. And there’s always the yearly “doc fix” (see comments above, on A.M.T. yearly “fixes”). This is where Republicans are going to get some concessions from the Democrats. Hopefully, Democrats will be the ones to write the terms of the cuts, so that benefits to beneficiaries are not impacted, but in some way or another health care spending is going to be cut. Perhaps Democrats can get creative, and demand that Medicare Part D (the Bush “prescription drug benefit”) be allowed to negotiate volume discounts from drug companies — which would be a minor Democratic victory, in the midst of a Republican win. I do think these cuts will stop short of raising the eligibility age for Medicare, but I could easily be wrong about that.

Republicans are going to have to have something in GB2 that they can sell to their House members, and to enough senators to get the bill passed. This is where Obama’s going to cave, and allow cuts to be made. This will allow Obama to say he has compromised and position himself as cutting a “centrist” deal. Perhaps he’ll get one final bargaining chip out of the deal and continue unemployment benefits, but most likely not.

 

There’s going to be pain all around in whatever deal is struck. Most Americans are going to be directly impacted in one way or another by whatever bargain is made between President Obama and congressional Republicans. Obama’s got most of the leverage on his side, including the fact that he just won a rather impressive election victory and he currently has a higher job approval rating than he’s had since Osama Bin Laden died. The biggest leverage is the deadline of New Year’s Day, but I still think it’s too early to tell whether a “Grand Bargain II” will be struck before or after the fiscal cliff is reached.

Perhaps the GB2 will be finalized before Congress goes home for the holidays. Perhaps America will go through a “Wile E. Coyote moment” where we dash off the cliff and stand in midair for a moment before realizing that there’s nothing under our feet but air. Perhaps the GB2 deal won’t be struck until we’re on our way down. However it plays out, I’ve laid out what I consider to be the most probable outlines of such a deal. Once again, I’m not advocating any of these as solutions, I’m merely predicting which outcome is most likely, given the facts on the ground and the way the players on both sides are talking about things in public at the moment.

 

Chris Weigant blogs at:
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