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yesh omrim

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In defense of the debt-ceiling deal

5 August 2011

In the aftermath of this week’s budget-cutting, debt-ceiling-raising compromise, both liberal Democrats and Tea Party Republicans have excoriated their respective leaders, charging that those leaders were snookered by the other side. The more I think about what happened, the more I believe that the Tea Party folks are right: Speaker Boehner got taken to the cleaners.

In order to understand why this is a win for the Democrats, we need to understand two things: what President Obama wanted (which, unfortunately, is not what the liberal wing of the Democratic Party wants) and what, in the absence of the debt ceiling, the Republicans could have acheived.

Once upon a time, there was a faction of the Republican Party known as the “Rockefeller Republicans”. They were liberal on social issues, but they tempered their liberalism with fiscal prudence, and they did not share Democrats’ distrust of big business. Chuck Percy, who like Obama was a Senator from Illinois, was one such. These days, we have another word for politicians with these views. We call them “Democrats”. And Obama is one such: his Senate voting record places him squarely in the middle of his party.

As the country is coming out of its most severe recession since the 1930s, Obama’s emphasis on deficit-cutting is horrid economics, but Hoovernomics is practically an article of faith among all but the most liberal Democrats these days. And unlike creationism and global-warming denial, balanced budgets are not just an American obsession: for example, the Conservative/LibDem coalition government in Britain is going the full monty for austerity, and so far things are turning out exactly as Keynes would have predicted, i.e., badly.

Furthermore, the Republican alternative is even worse. Since Reagan, the Republican fiscal strategy has been consistent: cut taxes, especially for the wealthy; run up the tab with loopholes and giveaways for Republican interest groups; when politically necessary, concede to Democrats on spending increases, but not on tax increases; blame the Democrats for the out-of-control deficit. The Medicare prescription-drug benefit, signed by Bush the Younger, is an excellent example of this phenomenon. It added $50 billion a year to the deficit at a time when Congress was slashing taxes. It provides a real benefit to seniors, but does so by subsidizing their private insurance premiums, and it left money on the table for Big Pharma by forbidding Medicare from negotiating a discount on the drugs it purchased. And eleven Democratic Senators (plus Jim Jeffords) voted for it.

Given that history, if the debt ceiling had not been in play this summer, what kind of budget would the Republicans be maneuvering to pass? I can easily imagine them retreating from the Ryan budget to something that “merely” makes the Bush tax cuts permanent, slashes Medicare, and repeals key components of Obamacare (e.g., the individual mandate). Then they would just need to tweak that budget enough to convince ten Democrats in the Senate that voting for this bill is better than letting the government shut down. Liberal Democrats would fume, moderates would be grateful that the carnage wasn’t worse, and Republicans would use Democratic profligacy as a key talking point in the 2012 elections.

A key concept in negotiation theory is the BATNA—Best Alternative To Negotiated Agreement. In the absence of a debt ceiling, the Democratic leadership’s BATNA is hampered by Republican control of the House, weak Democratic party discipline in the Senate, and the looming threat of a government shutdown.

The above scenario, I think, answers a question that has vexed many liberals. Why didn’t the Democrats raise the debt ceiling while they still had Congress? Why didn’t Obama take an uncompromising stand in favor of a “clean” debt-ceiling bill, with no strings attached? Because they didn’t want such a bill. They wanted to tie Republicans to the mast of deficit reduction, even if they had to tie their own party at the same time.

I believe that Obama’s preferred nice-guy result, in the “grand bargain” negotiations with Boehner, was something that would have reduced the long-term deficit with a combination of entitlement reforms (e.g., the rumored hike in the age for Medicare eligibility) and tax increases on the wealthy. The former would have pissed off the Democratic base and the latter would have pissed off the Republican base, but both sides would have gone into the 2012 elections with their sacred cows equally wounded. But Boehner wouldn’t play along, or couldn’t get his caucus to play along. So they ended up with a stopgap deal that, in the default case (i.e., the case where the “Supercongress” committee can’t make a budget), doesn’t mess with key entitlement programs and doesn’t raise taxes… until the Bush tax cuts expire, at which point both middle- and upper-class taxpayers get socked.

But now the Republicans are tied to the mast, because the Supercongress has to come up with a budget that actually cuts the deficit by $1.5 trillion relative to current law. If the Republicans on the committee say “hey, we’d like to make the Bush tax cuts permanent”, the Democrats will say “that’s going to add over $300 billion per year to the deficit; how are you going to make up for that and meet our deficit-reduction targets?” If the Republicans say “we were thinking of cutting Medicare”, the Democrats can simply say “no”, secure in the knowledge that if negotiations break down, taxes on the wealthy will automatically go up, but Medicare benefits will be preserved. In general, as this blogger observes, the automatic triggers in the debt-ceiling deal put a squeeze on industries that primarily donate to Republicans. In short, the Democrats’ BATNA in the next round has greatly improved.

As an extra bonus, the intra-party Republican tussles over the debt-ceiling deal has revealed how weak Republican party discipline is in the House. If the 66 Republican Representatives who voted against the deal are equally indisposed to vote for the Supercongress’s proposal, then Boehner will need to court not just one Democrat on the Supercongress, but 44 Democrats on the House floor, to get the actual deficit-reduction deal to become law.

If Boehner had been more politically savvy, he would have gone for the clean debt-ceiling increase.