What The Lame Duck Can Do

So as you have read as a prediction earlier on this site, and then seen and heard as news in the media, the economic-policy debate in this country has fully migrated from the halls of Congress to the campaign stump.  Nothing will be decided about the rapidly mounting debt despite the fast approaching collision with the “fiscal cliff” – a collision that was explicitly scheduled to be an action-forcing event.  We are left to consider what will happen after the election to head off the train wreck.

The expected “lame duck” session of the Congress will not be the Promised Land.  It will not bring a religious conversion on the part of Senators and Representatives newly freed from the unholy demands of their constituents.  However, in the most hopeful scenario, it will have to produce a change of course to avoid the scheduled collision with the fiscal cliff.  Here is a brief description of what will be required.

What is the motivation?  To this point, partisan advantage has driven just about everything in this budget showdown.  If that continues, hold on to your 401(k).  And as I wrote long ago, there will be no lame duck deal of any kind if either party sweeps the election.

However, perspectives could (not necessarily will, but could) change with a divided election outcome.  The party that loses the White House could realize that it will have no significantly greater leverage over a deal for at least four years.  Both sides should realize that the budget problem cannot be put off for another four years.  It will be time to sit down and reach an honorable compromise.

What is the vehicle?  A lame duck session of Congress cannot solve the budget problem.  The problem is too big and too complex, and any lame duck is too chaotic.  The lame duck will have to kick the hand grenade down the road without detonating it – itself no mean feat.  So that will require creating a process for the next Congress to follow.

All members of both political parties in the Congress are sick to death of budget processes.  (They are sick to death – still – of healthcare reform, too.)  The Supercommittee was a process that failed.  The automatic spending cuts are looking a lot less automatic than they once did.  People are shocked to realize that all of those temporary tax cuts actually are temporary.  Anything that smacks of a special process is suspect.  “Process” has lost its credibility.

However, our elected policymakers may realize, or they may come to understand, that this enormous budget problem cannot be solved in the “regular order.”  There are momentous deals to be cut in which the gives and the takes that must balance for the two sides appear in different programs under different congressional committee jurisdictions.  Anything this big is going to require some form of special process.  The Congress accepting one more special process is just one more improbable thing that will have to happen for us to get out of this mess.

What is the substance?  Washington is beginning to appreciate that the fiscal cliff would be an enormous hit on the economy – and that the economy is highly vulnerable.  If the United States were alone on this planet, we would gradually work off our inventory of vacant houses, and gradually get our financial institutions working again.  It would be slow, and it would be unsatisfying, but economic recovery would eventually appear.  But the world economy is the wild card, and it is looking more and more unfavorable.  Every major bloc or country – Europe, China, Japan, and many others – is weak.  That could derail our already unsteady recovery directly through weakened exports, or indirectly through the contagion of failing financial institutions.

Economists say that we cannot clobber the economy with deficit reduction.  Deficit hawks say that we cannot clobber the debt with economic stimulus.  Economists who are deficit hawks sound just plain clobbered.  But we have to learn to walk and dance at the same time – yet one more improbable thing.

The simple economics is that merely continuing the expiring tax cuts and spending levels is just steady-as-you-go; it is not “stimulus,” even if some of those programs were originally created as such.  And merely forestalling those automatic tax increases and spending cuts will entail more debt than the “baseline” of a frontal collision with the fiscal cliff.  But given the weakness in our economy and the threats from weakness overseas, the lame duck will have to continue much of what is in place – including both the tax cuts and the spending levels (which were already reduced by last year’s debt-limit deal, even before the sequester).

But then, ultimately to reverse that increase in debt and to maintain credibility with the financial markets, the lame duck will have to put in motion a bipartisan budget negotiation, aimed at the same magnitudes of savings as the Domenici-Rivlin and the Simpson-Bowles panels.  Because the economy is weak, the budget savings will have to begin perhaps two years down the road.  Because the savings will be delayed, credibility will be crucial.  And to achieve credibility, the deal will have to be bipartisan.  The financial markets to which we must continue to sell all of our masses of paper will have to believe that future savings will be achieved.  And that will require the commitment of both political parties, to show that any agreement is not conditional upon some future election.

The first instinct of some deficit hawks in Washington will be to demand that any remission of the provisions that make up the fiscal cliff be “paid for” on the spot, or that there be some kind of “down payment” of immediately enacted future deficit reduction to achieve credibility.  I believe that this would put form before substance, and could be counterproductive.

First of all, the economy needs relief from the fiscal cliff because of the risk of recession.  Replacing one form of immediate deficit reduction with another does not reduce the hit on the weak economy.

But even if the substitute deficit reduction is postponed – if it is some kind of “down payment” on the future deficit deal – it should be unnecessary for credibility, and it could make the achievement of the agreement on the process in the lame duck, and even the eventual budget deal, harder.

The process agreement in the lame duck will have credibility if the leaders of the two parties simply say in unison that the budget problem must be solved among the players who will be on the field on January 20, 2013.  The simple pronouncement by all the leaders that the problem must be solved before the next election will be enough to show that the new process is serious.

And beyond being arguably unnecessary, a down payment on a big budget deal will not be easy to achieve.  A mutually acceptable down payment must be a fair exchange between the two sides – and unlike the sequester, which was designed to be so terrible as to motivate action by both parties and never actually to take effect, a down payment must be written like both sides mean it.  It cannot be a comparatively simple 50-50 split between domestic and defense appropriations cuts (which the sequester was), because arguably both sides believe that their own priorities cannot be cut beyond the spending caps already imposed in the debt-limit deal a year ago (as much as both sides like to say that the other side’s priorities can be cut to achieve infinite amounts of savings).  So the down payment will have to come elsewhere in the budget.

A little tax increase as part of a down payment could easily make a subsequent big tax reform harder.  Tax reform is a combination of closing tax preferences and reducing tax rates.  Without the sweetener of lower tax rates, closing “loopholes” is much more painful.  And closing loopholes ironically can be easier if everyone’s ox is gored a little.  That way everyone gets the same treatment, and the resulting rate reduction (and deficit reduction) is greatest.  Picking out just a few oxen for selective cuts will raise complaints of unfair treatment, and the victims will have no guarantee that the promised eventual rate reduction will materialize.  In the same way, a little Medicare cut might make the ultimate Medicare reform harder.  Are there other places in the budget to find savings that can be politically balanced so as to be acceptable to both sides, to be large enough to be worth the effort, but not to be so large as to be impossible to find or to agree upon in a chaotic lame duck session?  I cannot rule out a successful confidence-building down payment, but I am skeptical; and if the necessary legislative energy is needed elsewhere to craft a deal, I would not spend it on a questionable down payment.

So the process created by the lame duck must: turn off much of the automatic deficit reduction that makes up the fiscal cliff; set targets for future budget savings, probably starting in 2015 but certainly no sooner than 2014; set up a process, probably modeled after the budget reconciliation process, through which the regular congressional committees of jurisdiction are charged to find their quotas of deficit reduction; and provide for expedited consideration in the Congress, free of the threat of filibuster in the Senate, over the course of 2013.  If this happens, the subsequent negotiations will be fierce and ugly, necessarily including additional revenues and restructuring of Medicare from a Congress whose two largest ideological blocs abhor, respectively, any increase in taxes and any change in Medicare.  But there is at least the hope that the concessions of the various political and regional factions will both balance out and sum up to the budget savings needed to stop the unsustainable growth of the public debt.

Can this happen?  It is at least improbable.  But many improbable things will have to happen, soon, if this exceptional country is to remain exceptional.

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