'Grand bargain' called more likely as fiscal cliff approaches
WASHINGTON — Two years ago this month, the leaders of a presidential commission rolled out a startling plan to dig the nation out of debt. After decades of profligacy, they said, Washington must tell people to work longer, pay higher taxes and expect less in retirement.
Lawmakers recoiled from the blunt prescriptions of Democrat Erskine Bowles and Republican Alan Simpson. But their plan has since been heralded as a model of clear-eyed sacrifice, and policymakers say the moment has come to live up to its promise.
When Congress returns to Washington on Tuesday, the most urgent task facing President Obama and congressional leaders will be avoiding the year-end “fiscal cliff,” a towering accumulation of $500 billion in budget cuts and expiring tax breaks that would abruptly reduce government borrowing but could trigger a recession.
In the past, policymakers have handled such moments by delaying the pain and giving themselves new deadlines for getting the budget under control. Now, however, the national debt is larger, as a percentage of the economy, than at any time except for the period after World War II — and it's rising rapidly. Avoiding hard decisions could have grave consequences, analysts say, potentially undermining the economic recovery and the world's confidence in American leadership.
“I think this is the magic moment,” said Bowles, a veteran negotiator who served as chief of staff in the Clinton White House. “They've got to compromise. And I think if you listen carefully to what all the politicians are saying, there's room to get something done.”
Few expect Washington to replicate the scope of the Bowles-Simpson plan. Last week, House Speaker John Boehner, R-Ohio, publicly urged Obama to return to a less ambitious framework drafted in secret during the summer of 2011, when the two men came tantalizingly close to compromise. That blueprint would save about $2 trillion, on top of $1.3 trillion in agency cuts in force.
About half the new savings would come from reversing part of the tax cuts that, along with the collapse of tax collections during the recent recession, are a major cause of budget problems. The rest would come from lower spending, including on Social Security and Medicare, forecast to be the biggest drivers of future borrowing.
The 2011 talks collapsed when Obama asked for more revenue and Boehner, facing a conservative insurrection over taxes, abruptly called the deal off. The obstacles are similar now: Republicans are still talking about raising money through economic growth rather than higher taxes, and key Democrats are arguing that Obama's re-election entitles them to resist cuts to retirement benefits while demanding even more in new taxes.
Still, as they prepare to start a fresh round of talks on Friday in the White House, Boehner and Obama have delivered nuanced public statements that seem to leave the door open to the historic “grand bargain” both men are said to desire.
Policymakers face a particularly brutal decision point.
The fiscal cliff amounts to the largest one-year dose of government austerity since 1968, when Congress raised taxes and was blamed for triggering a recession. Delaying the pain is not an option, economists say.
“We would be stepping into an economic netherworld of slow growth and high unemployment that would leave us very vulnerable to anything else that goes wrong,” said Mark Zandi, chief economist at Moody's Analytics.
For decades, Washington has been postponing tough decisions about taxes and spending. The result: dozens of temporary provisions that are forever expiring. This year, they all come due Dec. 31.
Take the Medicare sustainable growth rate, or SGR. Enacted as part of the 1997 Balanced Budget Act, the SGR was designed to make sure payments to providers grew no faster than the overall economy. But doctors screamed when the formula required cuts in 2002, and Congress has since passed legislation, known as the “doc fix,” to temporarily override the SGR.
Because Congress has not changed the underlying formula, the doc fix gets more expensive each year. In January, Medicare providers face a payment cut of 27 percent unless lawmakers come up with $18 billion to override the formula for another year.
The cliff is packed with such quandaries. On the tax side, most date to the start of the George W. Bush administration, when the budget was in surplus.
The Bush tax cuts were so big and far-reaching, their effects rippled through the code. Suddenly, millions of people's tax bills were so low they were in danger of being forced into an expensive parallel system known as the alternative minimum tax, or AMT. So that had to be patched, too.
The latest AMT patch expired last December, and unless Congress acts, 26 million people will have an extra $3,700, on average, tacked onto their 2012 tax bills. The cost of patching the AMT for 2012: $92 billion.
The Bush tax cuts are temporary. Lawmakers designed them to expire in 2010. Obama extended them for another two years, piling on a temporary payroll tax holiday. That expires in December.
Expiring tax breaks account for nearly four-fifths of the $500 billion the cliff is projected to suck out of the economy. Automatic budget cuts, known as the sequester, amount to $65 billion, according to the Congressional Budget Office.
“We've been resisting the obvious for the past two years,” said Rep. Peter Welch, D-Vt., a liberal who advocates compromise. “And the obvious is: There's no grand bargain that will not cause political pain for all of us.”