By James Kwak
1. Obama still has his hostage—if he wants it. As far as I can tell, the Bush tax cuts are nowhere in the debt ceiling agreement, which means that at current course and speed they expire at the end of 2012. Extending the tax cuts would reduce revenue by about $3.5 trillion over the next decade. According to news reports, Obama was willing to extend the Bush tax cuts in exchange for $800-1,200 billion of additional tax revenue—in other words, he was willing to cut taxes by about $2.5 trillion relative to current law. Boehner and Cantor walked out because of some combination of (a) they couldn’t get their members to vote for that tax “increase” or (b) they think they will be able to extend all the tax cuts if they negotiate that deal separately. I wouldn’t be so sure about (b). Remember, gridlock means the tax cuts expire.
2. The next step of the deal is that a joint Congressional committee is supposed to come up with a plan to reduce deficits by $1.2-1.5 trillion over ten years. If they fail to come up with a plan, or their plan is rejected by Congress, then there will be major automatic cuts in discretionary spending, including defense. (There will also be cuts in Medicare reimbursement rates, but not in Social Security or Medicaid.) The idea on Obama’s side is that the prospect of major defense cuts will force Republicans to negotiate. But if they were willing to let the government default rather than increase taxes—even by closing tax loopholes—why do we think they will be afraid of some defense budget cuts? Traditional Republicans may have liked high defense spending, but not the new breed. Ron Paul is basically an isolationist; Grover Norquist thinks the defense budget should be reduced.
3. Obama needs the joint committee to succeed more than the Republicans do. Without it, he only gets a total of $2.1 trillion in debt ceiling increases, which may not get us through the next election—especially with the economy seeming to only get weaker. Since he is starting out with the weaker hand, I don’t see how he gets anything unless he is willing to hold the Bush tax cuts hostage. The tax cuts can’t be part of the joint committee plan because the committee has to find deficit reduction relative to the CBO baseline, and the baseline assumes that all the tax cuts expire. But presumably it could be negotiated in parallel as a separate issue. More likely, though, I expect we’ll get a joint committee deal that is all or virtually all spending cuts, and Obama will pressure enough Democrats to go along in order to remove the risk of another crisis just before the election. Then, frustrated at giving in to Republicans on every issue, the Democrats prevent the Bush tax cuts from being extended, and we have mutual assured destruction (both sides lose what they want most).
4. In any negotiation, you want to convince the other side that you are unable to compromise. Then the other side has to compromise. The Republicans have done this brilliantly with the anti-tax pledge: Boehner and Cantor can say, with complete honesty, that no bill that increases taxes in any way can get through the House, since a majority of the House has pledged to vote against it. And they will stick to that pledge, or else they will get attacked from the right in the primaries next year. The Democrats have no response. I don’t see how this is going to change.