Nov. 23, 2011

Imagine if the Democrats offered Republicans a deficit deal that had more than $3 in tax increases for every $1 in spending cuts, assigned most of those spending cuts to the Pentagon, and didn't take a dime from Social Security, Medicaid or Medicare beneficiaries. Republicans would laugh at them. But without quite realizing it, that's the deal Republicans have now offered to the Democrats.

In August, Republicans scored what they thought was a big win by persuading Democrats to accept a trigger that consisted only of spending cuts. The price they paid was 1) concentrating the cuts on the Pentagon while exempting Social Security, Medicaid, Medicare beneficiaries, and 2) delaying the cuts until January 1, 2013. That was, they figured, a win, as it eschewed taxes. Grover Norquist's pledge remained unbroken.

But 12 years earlier, George W. Bush had set a trigger of his own. In order to pass his tax cuts using the 51-vote budget reconciliation process, he had agreed to let them sunset in 2010. A last-minute deal extended them until the end of 2012.

So now there are two triggers. One is an extremely progressive spending trigger worth $1.2 trillion that goes off on January 1, 2013. The other is an extremely progressive tax trigger worth $3.8 trillion that goes off on...January 1, 2013. If you count reduced interest payments, the two policies alone would reduce future deficits by about $6 trillion. That's far more than anything the supercommittee came close to discussing. It's distributed far more progressively than anything the Democrats have even considered proposing. And all that needs to happen for it to pass is, well, nothing.

Republicans can't stop these triggers on their own. They need Senate Democrats and President Obama to join them in passing an alternative, or they need House and Senate Democrats to join them in overturning President Obama's veto of their alternative. So the only way for Republicans to avoid this dual-trigger nightmare is to somehow convince Democrats to bail them out. And for that, they have two points of leverage.

The first is political: Democrats don't want to raise $3.8 trillions in taxes, much of which will fall on middle-class households. Already, Democrats have said that their preference is to make the the Bush tax cuts for income under $250,000 permanent. That means making 80 percent of them permanent.

The second is that this particular deficit-reduction plan could be devastating for the economy. Rather than phasing in slowly over the course of the next decade, it would all hit at once. If the economy was stronger, that might be fine. But in a recovery this weak, it could lead to another contraction.

So the GOP is not without options. But the Democrats are in the driver's seat. Gridlock means a deficit deal that they could never have imagined getting any other way. Basic negotiating theory would suggest that whatever the Republicans offer them must somehow be better even than that. And yet, that's not how either party is acting. Republicans don't seem particularly worried about the triggers and Democrats don't seem particularly interested in pressing their advantage. At least for now.

Talk to the White House, and you'll hear that they fiercely oppose permitting the Bush tax cuts to expire, and that they would prefer to see the spending trigger replaced with a bigger, more thoughtful deficit-reduction plan. But then, they would say that, wouldn't they?

Letting the Bush tax cuts expires is not a popular policy. Nor do crowds cheer for automatic sequestration. If they happen due to Republican obstruction, that's one thing. If they happen because Democrats don't want to make an alternative deal, that's quite another.

So I take the White House at their word when they say they want to extend most of the Bush tax cuts. But it's hard not to wonder. Their economic-policy team can run the numbers as well as anyone else can. They know the revenue levels they're talking about are completely insufficient to deal with the retirement of the Baby Boomers. And if they try their hardest to come to a deal with the Republicans, but it, like so many other deals over the last year, falls apart at the last minute because the GOP won't break their tax pledge and let the upper-income cuts expire, do they really think that would be a bad outcome? Or is it a better one than they could have imagined?

Top Stories

1) Obama is stepping up his campaign to renew the payroll tax break, report Peter Wallsten and Lori Montgomery: "With taxes set to rise for nearly every American worker, President Obama sought Tuesday to highlight his tax-cutting bona fides, accusing Republicans of hypocrisy if they do not agree to extend a payroll tax cut that is set to expire in January. Obama’s comments were part of an escalating White House campaign against Republicans that is painting them as defenders of the wealthy at the expense of the middle class. That effort took on new life Tuesday, a day after a congressional 'supercommittee' declared that it had failed in its efforts to forge a new fiscal path for the country, including possibly extending the payroll tax cut. As the White House looks for a political advantage on the payroll tax issue, lawmakers in both parties are conflicted about an extension of the break."

2) It looks like the supercommittee's defense cuts are here to stay, reports Jennifer Steinhauer: "Mere seconds after the leaders of a joint Congressional committee announced their failure to reach a deficit deal, the chairman of the House Armed Services Committee announced he would try to undo the consequences. Yet...members of Congress who hope to overturn the automatic cuts may find their biggest obstacle is not President Obama, who has already called the reversal of $1.2 trillion in cuts over 10 years a nonstarter, but leaders of both parties in Congress...Democrats have said that absent a plan with spending cuts and new taxes -- like the one members of the so-called supercommittee tried in vain to produce -- the Pentagon cuts will abide...On the Republican side, the leadership also seems unenthusiastic about a messy floor fight over the automatic cuts."

3) Obama will veto a full extension of the Bush tax cuts, reports Brian Beutler: "President Obama has threatened to veto any legislation that attempts to eliminate the automatic penalties for Super Committee failure. But on January 1, 2013 -- the same day the automatic, across the board spending cuts are scheduled to take effect -- all of the Bush tax cuts are set to expire. And the White House plans to use the threat of full expiration the exact same way they’re using the threat of sequestration -- to force Republicans to accept a higher tax burden on wealthy Americans. 'He won’t sign a full extension,' said one Senior Administration Official at a White House background briefing for reporters on the Super Committee. 'I think if you look at everything that happens in January 2013, it is a compelling argument that there’s a need to make real policy,' said another Senior Administration Official."

4) Italian bondholders could control the country's fate, reports Landon Thomas: "Even though Europe’s debt crisis has turned Rome into financial ground zero, Italy has been able to lean on at least one solid support: the relatively large amount of government debt held by Italians themselves. Nearly 57 percent of Italian debt is held by Italian banks, insurance companies and individuals. Those holdings have helped slow the flight of capital from Italy, even as foreign investors have been withdrawing their money from the country to park in safe havens like German, Swiss, American or Japanese government bonds. But financial officials have become jittery about the possibility that Italians may stop buying this debt, and instead become more like Greeks and send their hard-earned savings abroad. If that were to happen, it would greatly raise the odds that Italy...would be forced to seek a bailout."

Top Op-eds

1) Income inequality is breaking America's political system, writes Peter Orszag: "It is striking that both income inequality and political polarization began to rise sharply in the U.S. in the mid- to late 1970s. Yet many pundits airily dismiss this connection, arguing that because blue states are, on average, higher-income than red states, the link between income and partisanship must be weak. Instead, they attribute increasing political polarization to the gerrymandering of legislative districts. Both of these assertions are empirically false...Residential segregation by income has been increasing markedly, and since income is strongly related to voting patterns, this phenomenon may help explain the rise in residential segregation by political party. As we surround ourselves with people like us, we reinforce our own views, and the result is a more polarized population."

2) America's political system isn't democratic enough, writes Francis Fukuyama: "The advantage of the British system with its fewer opportunities to cast vetoes is clear when it comes to passing budgets. The budget is written by the chancellor of the exchequer, who as an executive agent makes the difficult trade-offs between spending and taxes. This budget is passed by parliament, with little modification, a week or two after the government introduces it. In the American system, by contrast...the budget that eventually emerges after months of interest group lobbying is the product not of a coherent government plan, but of horse-trading among individual legislators, who always find it easier to achieve consensus by exchanging spending increases for tax cuts. Hence the permanent bias towards deficits."

3) Big federal cuts are possible, writes Glenn Hubbard: "We should...let states experiment with alternatives to our current one-size-fits-all federal solution. The best example is Medicaid, which should be converted into a block grant. Replacing federal matching support with block grants eliminates state incentives to attract additional federal subsidies, while allowing states to manage Medicaid more efficiently. Federal Medicaid costs should be capped at growth of 1% over the inflation rate...A more modern version of traditional Medicare would replace Parts A, B and D with comprehensive benefits including coverage for catastrophic costs and prescription drugs. Simpler cost-sharing would be offered--with one deductible for inpatient and outpatient services and a common coinsurance rate for all services. Medicare would be placed on a budget through premium support."

4) The supercommittee's failure isn't Obama's fault, writes Ruth Marcus: "For all the eleventh-hour, 'where-was-Obama?' moaning, the bipartisan congressional directive to the White House as the supercommittee did its work was simple: Back off. That’s right. The message from both Republican and Democratic members of the group was that presidential involvement could only be counterproductive. The more a particular approach was associated with the president, they argued, the harder it would be for Republicans to embrace it. Anything that looked like an Obama “win” would have been unacceptable to Republicans in an election cycle."

'90s pop interlude: Matthew Sweet performs, discusses "I've Been Waiting".

Got tips, additions, or comments? E-mail me.

Still to come: The Fed is running a new round of stress tests; automatic Medicare cuts would hit hospitals the hardest; Newt Gingrich is tacking left on immigration; the EPA is under fire for new mercury rules; and a raccoon sits down for a meal.

Economy

The Fed will stress test big banks again, reports Neil Irwin: "Bank regulators will test the ability of the nation’s largest banks to withstand a new deep recession and wider financial crisis in Europe, the Federal Reserve said Tuesday. The Fed detailed its plans for the second annual stress test of large financial institutions, a step meant to ensure that giant banks can survive and remain well-capitalized even in grim scenarios for the economy. The stress-test approach was first used during the depths of the financial crisis in 2009, and has become a part of the Fed’s regular tool kit for overseeing big banks. Fed examiners will estimate the losses that would be incurred by the 19 largest U.S. banks -- including Citigroup, J.P. Morgan Chase and Bank of America -- if a new economic downturn drove the U.S. unemployment rate to 13 percent and if Europe experienced a severe recession."

Foreclosure negotiators are moving forward without California, report Ruth Simon and Nick Timiraos: "Bank representatives and government officials are working on a broad settlement of most state and federal foreclosure-practices investigations that could move forward without the participation of California, long considered a key to any deal, people familiar with the negotiations said. The terms of the deal remain fluid. Banks have proposed a deal excluding California that would carry a value of $18.5 billion, though the final outcome remains uncertain, people familiar with the discussion said. Negotiators are continuing to make a push to persuade California to join a settlement valued at $25 billion among federal officials, state attorneys general and the nation's five largest mortgage servicers: Ally Financial Inc., Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co."

The economy grew more slowly than thought this year, reports Neil Irwin: "The U.S. economy grew more slowly in the summer than earlier thought, according to new data. But the reason could bode well for the final months of the year. Economic activity, as measured by gross domestic product, rose at an annual rate of only 2 percent in the July-through-September quarter, not the 2.5 percent that the Commerce Department estimated late last month. The revision, however, stemmed from businesses running down their inventories by $8.5 billion, which means that the nation’s factories may need to ramp up output to meet demand for their products. Revised figures for final sales, which reflect growth excluding inventory fluctuations, remained the same as originally estimated."

A bank defendant is blaming his regulator, report Louise Story and Gretchen Morgenson: "In the whodunit of the financial crisis, Wall Street executives have pointed the blame at all kinds of parties -- consumers who lied on their mortgage applications, investors who demanded access to risky mortgage bonds, and policy makers who kept interest rates low and failed to predict a housing market collapse. But a new defense has been mounted by a bank executive: my regulator told me to do it. This unusual rationale is presented by the bank executive in one of the few fraud suits brought against a mortgage banking official in the aftermath of the financial crisis -- the one filed by the Securities and Exchange Commission against Michael W. Perry, former chief executive of IndyMac Bancorp, which failed spectacularly in mid-2008."

Adorable animals thinking they're people interlude: A raccoon sits down to dinner.

Health Care

Automatic Medicare cuts would hit hospitals the hardest, reports Sam Baker: "Automatic Medicare cuts triggered by the congressional supercommittee’s failure would hit hospitals harder than any other health industry, according to an analysis from Avalere Health. The report puts hard numbers to across-the-board cuts that stakeholders have mostly viewed in broad, general terms. But Avalere chief executive Dan Mendelson cautioned that the figures also assume the automatic cuts will actually happen -- an assumption he’s not ready to make. The supercommittee’s cuts, if it had agreed on a deal, likely would have started next year. But sequestration isn’t scheduled to begin until 2013...The automatic Medicare cuts are reductions in payments to doctors, hospitals and other healthcare providers. The trigger does not include any direct cuts to Medicare benefits."

Congressional Democrats are lobbying the White House to hold the line on birth control, reports N.C. Aizenman: "Democratic lawmakers, fearful that President Obama is on the verge of significantly diluting a proposed regulation that would give millions of women access to birth control without out-of-pocket insurance charges, are furiously lobbying the White House to hold the line. At issue is whether the provision, announced in August, should exempt a far broader range of religious organizations than originally proposed. In a phone call with senior White House adviser David Plouffe on Tuesday afternoon, eight senators argued that the consequences of expanding the exemption would be devastating, according to people familiar with the call. Sen. Jeanne Shaheen (D-N.H.) also raised the issue with Obama while she was with him in New Hampshire on Tuesday, her spokesperson said."

Domestic Policy

Newt Gingrich is tacking left on immigration, reports Alexander Burns: "Ascendant Republican presidential candidate Newt Gingrich delivered an unapologetic defense of his views on immigration Tuesday night, declaring in a foreign policy debate that the GOP should not adopt a platform on immigration that 'destroys families that have been here a quarter-century.' Gingrich came under fire from multiple opponents for declining to say that he would turn out all of the country’s illegal immigrants...But Gingrich stood by his past support for policies loathed by some immigration hawks, including the Simpson-Mazzoli immigration law that included an amnesty provision. And he said the United States had a responsibility to respect families who have been in the country for decades - even if they include members who originally crossed the border illegally."

The FCC wants to block AT&T and T-Mobile's merger, reports Jia Lynn Yang: "AT&T, with its powerful army of lobbyists and years of experience navigating Washington, thought it could easily persuade the government to approve its merger with T-Mobile. But regulators aren’t buying it, and the $39 billion deal is facing its biggest threat yet. Federal Communications Commission Chairman Julius Gena­chow­ski dealt a serious blow to the merger Tuesday, moving to block the deal on the basis of findings that it would cause job losses and higher prices for consumers, officials said. It was an unusual move for the FCC, which has not tried to block a deal since 2002. AT&T now faces its second major barrier from the government. The Justice Department’s antitrust division has already sued and is scheduled to present its case against the deal in February before a federal judge."

The bar association is blocking a number of Obama court picks, reports Charlie Savage: " The American Bar Association has secretly declared a significant number of President Obama’s potential judicial nominees “not qualified,” slowing White House efforts to fill vacant judgeships -- and nearly all of the prospects given poor ratings were women or members of a minority group, according to interviews. The White House has chosen not to nominate any person the bar association deemed unqualified, so their identities and negative ratings have not been made public. But the association’s judicial vetting committee has opposed 14 of the roughly 185 potential nominees the administration asked it to evaluate, according to a person familiar with the matter."

Grassroots opposition to the Stop Online Piracy Act is spreading, report Hayley Tsukayama and Cecilia Kang: "As Web firms recently pressed Congress to free them from liability for pirated content on their sites, they turned to a natural lobbying technique: starting a viral campaign. First came the catchy slogan: 'Don’t Break the Internet.' Then came pleas for support on message boards, Twitter and online forums. The result: a million people e-mailing Congress and 87,000 telephone calls, according to figures posted on the American Censorship Day Web site. The campaign illustrated the quick ability of Silicon Valley to generate a massive grass-roots movement to serve its interests...Some of the biggest companies in technology, including Google, Facebook, Microsoft and Intel...want to soften a bill in Congress that could empower law enforcement to shut down their sites if they host pirated content."

DVD commentary interlude: Arnold Schwarzenegger's thoughts on "Conan the Barbarian".

Energy

The EPA's new mercury rule is drawing fire, reports Darius Dixon: "The Environmental Protection Agency soon-to-be-issued utility mercury and air toxics rule could be a death knell for reliable electric service in parts of the country, opponents warn -- while accusing the agency of intentionally ignoring the potential harm. But supporters call those complaints exaggerated, saying they come largely from a small portion of the energy industry trying to protect older coal-fired power plants. Meanwhile, nobody has produced a universally accepted estimate of how the rule would affect power generation. Utilities are divided over the rule. Even members of the Federal Energy Regulatory Commission, which has responsibilities for overseeing the electric grid, disagree on how a suite of EPA air and water regulations will affect reliability."

Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams.

newsletters@email.washingtonpost.com