November 26, 2012
Learning to Love Simpson-BowlesBy Randall Hoven
What should Republicans in Congress do right now about the "fiscal cliff"? Everyone has advice, almost none of which squares with reality. Republicans have only two levers of control: the House of Representatives and filibusters in the Senate. Consider the options.
Option 1: Do nothing. If no new legislation gets passed we hit the so-called "fiscal cliff." That means all "Bush tax cuts" would expire, for rich and non-rich alike. It means other tax cuts and credits added under Obama (payroll tax cuts, child tax credits, etc.) would also expire. The Congressional Budget Office estimates all that at $4,532 billion over the next decade, or almost 11% of all projected federal revenue.
Then there is the spending side of the fiscal cliff, or sequestration. The CBO says sequestration amounts to $492B in military cuts and another $492B in non-defense cuts from the current baseline over the next decade. If these "cuts" are allowed to happen, federal spending would be $43,823B over the next decade. That means sequestration amounts to a 2.2% spending cut, or spending would go up only 55% instead of 58%.
But that's not all. We also have Obama's Medicare cuts, which mean paying doctors less while expecting the same level of care. That's another $245B over the next decade.
Now if deficits are your one and only concern, and you actually believe the CBO's projections, the fiscal cliff looks like a good thing. In fact, "doing nothing" is what the CBO calls its "baseline." And deficits in the CBO's baseline are under 3% of GDP (a good thing) by 2014, and under 1% of GDP from 2016 on. Such deficits would be lovely, if true.
But there are a few bad things about doing nothing.
• There is no way that revenues will go up as much as the CBO projects, and they might not go up at all. The CBO is required by Congress to assume that the economic behavior of businesses, individuals, investors, home-buyers, etc. do not change when tax rates change. That is called "static scoring." The government would be lucky to collect even half of what CBO calculates.
• The economy will grow more slowly or even shrink if this happens, having the double-whammy of having even less deficit reduction than that calculated by the CBO.
• The pain will be real and those bearing it will notice: taxpayers, doctors, the military and its contractors, many people not getting government services and those providing them, etc.
• It will all be blamed on "the party of no," which everyone will take to mean the Republicans.
That is: it won't work; it will hurt; and Republicans will be blamed for it.
Option 2: "Do the right thing." This option means Republicans simply pass what they think is good legislation and let what happens happen. If you wonder what Republicans consider "good legislation," think Paul Ryan's Roadmap or Cut, Cap and Balance.
This option has a very predictable outcome: it will be killed in the Senate. How do we know that? That is exactly what the Republicans did over the last two years and that is exactly what happened. Then Republicans lost the next election.
The Republican-led House passed budgets on time the last two years. Both times those budgets were good, responsible budgets, shepherded through Congress by Paul Ryan. The House also passed Cut, Cap and Balance as a response to hitting the debt limit. In every case, the Senate killed the legislation. Democrats controlled the Senate then, and they control it now. Harry Reid is still Senate Majority Leader.
In short, Option 2 is the same as Option 1 in almost every respect. Since it won't pass, the legislative result is the same as doing nothing, meaning the fiscal cliff, and Republicans will be blamed for it.
Just to be clear, all calls for Republicans to stick to their no-tax-increase guns amount to calls for Option 2. If Republicans do not agree to some kind of tax increase, there is no chance that anything they propose will become law.
Option 3: Compromise. This means more than offering compromise; it must mean actually getting compromise legislation to pass the House, pass the Senate and any possible filibusters, and also get Obama's signature. If Republicans merely offer compromise that doesn't pass, Option 3 becomes Option 2 which becomes Option1 which is the fiscal cliff. And, with about one possible exception, noted below, Republicans will get blamed for not compromising enough.
So for Option 3 to mean anything, it must be a compromise that can pass. And here is where opinions differ, and where the real gut check comes in. What is the Republicans' real, no-kidding, bottom line?
In any negotiation, each party must know the true threshold at which no deal is better than a bad deal. Unless you are ready to accept "no deal," you are not really negotiating; you are pleading. (See, for example, the last debt ceiling fiasco.)
Republicans will not get to choose among a spectrum of options that includes "the perfect." There are really only two options: (1) something Democrats will accept, or (2) no deal. Know this. It is a truism, but so hard for so many to accept.
So what is it we really want, budget-wise? I will go out on a limb and say what we (conservatives) want is smaller government. If you accept this, and also the truism just stated, Republicans should be willing to accept a deal if it leads to smaller government than no deal would.
And "no deal" is the CBO's baseline. In 2022, CBO's baseline projects federal revenues of 21.4% of GDP and spending at 22.3% of GDP. Let's compare alternatives.
For the "perfect" Republican plan I will use Paul Ryan's Roadmap as submitted in 2010. The CBO scored that plan. We also have Simpson-Bowles, which hopes to balance both spending and revenues at 21% of GDP. The CBO also scored President Obama's most recently submitted budget (which lost unanimously in Congress when put to a vote). And for comparison, I provide 2007 actuals, per the Office of Management and Budget.
Proposed Budget Plans, 2022 Time-Frame (% of GDP)
Now you might see why so many people didn't care much about budget issues in the election. On paper, there is really very little difference among proposals, at least as the CBO projects them. Romney ran on getting spending down to 20% of GDP. That's an improvement over the other proposals, but (a) not by that much, (b) still not back to the pre-Obama level, and (c) he lost.
There are a few things to note from that table:
• Everyone is proposing less revenue (lower taxes) than the "do nothing" option, or the fiscal cliff.
• On the spending side, doing nothing is not that bad, and Simpson-Bowles is actually the thriftiest.
• On the spending side, doing nothing is better than Obama's budget and not much worse than the Ryan Roadmap.
For the record, I don't believe a single revenue projection that CBO publishes, since it uses static scoring. The CBO also assumes GDP growth of 4.3% per year from 2014 through 2017. These two assumptions alone, static scoring and unrealistic economic growth, make the above table close to useless for anything other than relative comparisons.
But it is relative comparisons we need to make. Plus, there is a kind of "bright side" to those CBO revenue projections: revenues won't really go up near as much as the CBO projects. That is, tax increases will not be as bad as they appear on paper. Let CBO and OMB economists assume whatever they want; real people will make decisions so that the federal government, if it's lucky, will collect about 18% of GDP. That's what it has been since World War II; to expect much more is delusional. Right now the government would be lucky if it merely collected that average, as it did under President Bush.
Getting back to Option 3, Republicans should be willing to accept any deal better than the Option 1 of doing nothing (or the equivalent Option 2). Yes, even if it means raising tax rates.
The reason is that otherwise, not only will the real-world results will be bad, but Republicans will be blamed for it. As a reminder, Republicans stuck to their no-tax-increase guns the last two years, which brought us 2012. It is a lose-lose strategy at this point, I am sorry to say.
Don't be stupid. Let Republicans give in a little on tax rates. (Don't worry; it won't matter. Read on.)
And if Republicans choose Option 3, there are two possible outcomes: (1) Democrats will accept the compromise; or (2) they won't.
• If they accept it, the deal must be worth having, meaning better than Option 1 (and therefore Option 2 as well).
• If they won't accept it, Republicans need to make sure the Democrats get the blame for no compromise. And the only way to make that happen is to propose a compromise that is seen as something truly bipartisan and "reasonable." This will not be easy, given that the media is an arm of the Democratic Party.
Here is what I recommend: the Simpson-Bowles plan as straight as it gets. Just adopt it as proposed, without Christmas-treeing it up. If possible, get Democrat cosponsors. Even better: get a Democrat to submit it.
I am on record as being adamantly against Simpson-Bowles, so please hear me out.
First, there is the reality of Simpson-Bowles, if it were to actually pass. It is better than the fiscal cliff, or Options 1 and 2, in terms of smaller government. It's certainly not what we want, but what we want is not a feasible option at this point. Face it, we lost in 2012.
Secondly, it is about the only proposal that is a ready-to-go "bipartisan compromise" and that will be seen as such. There were 18 members of the Simpson-Bowles commission, and 11 voted for it - it needed 14 to be adopted. If it would pass, it would put Obama in the hot seat of having to accept it or reject it. (This is why it should not be Christmas-treed up: don't give Democrats the excuse of saying "it's a Republican plan.")
As it is, Obama can wash his hands of it, saying even the commission itself did not pass it. But if it passes, Obama must own it. If Republican congressmen Paul Ryan, Jeb Hensarling, and Dave Camp would switch their votes, it would be enough to pass that hot potato to the Democrats. They should say, "the people spoke on November 6" and that they listened to the voice of the American people telling us all to work together, yadda yadda. Then let the Democrats own what comes after.
Thirdly, I don't think Democrats will pass it. If you look at the table above, I don't think Democrats would accept any plan better than the fiscal cliff. I think their entire strategy is to make sure Republicans get the blame, period. So don't worry about not getting your perfect plan: you won't get it no matter what. But at least the blame can be put on Democrats, where it rightly belongs.
Get it? There is no way we can get what we want. But the worst of both worlds is to get bad policy and get blamed for it. The beauty of Simpson-Bowles at this point is that it probably won't pass in any case, but even the Keystone Republicans should be able to play it in the media in a way that puts the blame on Democrats if they kill it.
And if worst comes to worst, it might actually pass. But if it does, it would mean smaller government than the other feasible alternatives. And isn't that what we're about? Don't worry about higher revenues; the government will never collect them.
Having given my free advice, I expect no one to follow it. The Republican Party is not known as the Stupid Party for nothing. It has a gift for getting both bad policy and the blame for it. Plus, I have no faith that the Republican leadership even shares the conservative goal of smaller government.
My prediction: Republicans will offer to raise tax rates on "the rich" in exchange for smaller "cuts" in defense spending. Plus, some more patchwork that will include temporary extensions and putting off real changes to the out-years. It won't work and Republicans will be blamed - as sure as the sun will rise tomorrow.
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