Remember sequestration, the provision of the Budget Control Act that imposed automatic across-the-board cuts around 8-10% and will continue to hold spending levels low for years to come? Democrats really hate it, and they can’t figure out how to get Republicans to do a deal to cancel at least part of it.
Theoretically, sequestration was never supposed to go into effect, because it was too horrible to contemplate. Would Republicans really allow a 10% spending cut at the Department of Defence?
The threat of sequestration was supposed to motivate Republicans and Democrats to reach a “grand bargain” on taxes and entitlements that would cut the deficit in a less-arbitrary way, with fewer negative short-term economic effects.
This didn’t work because sequestration isn’t horrible — it’s merely bad. It doesn’t reach the threshold of awfulness that can shake this Congress into bipartisan policy agreement. In fact, a lot of Republicans think sequestration is pretty good policy, since it’s a spending cut.
When I talk with Democrats in Washington, I don’t think this political reality has sunk in. They still think of sequestration as something everybody hates, that should therefore be replaced with a balance of concessions from the right and the left.
Here’s what they need to understand going into a budget conference that is theoretically supposed to produce a deal by Dec. 13:
- Democrats hate the sequester way more than Republicans do. Therefore, if the sequester is going to be replaced, Democrats will have to concede more than Republicans.
- The sequester replacement “bargain” that Democrats typically float is a non-starter. They want to raise taxes (which Republicans hate) and cut old-age entitlement programs (which Republicans are ambivalent about) about in order to undo discretionary spending cuts (which Republicans kind of like). What’s in this deal for Republicans?
- Democrats often name Sen. John McCain (R-Ariz.) and Rep. Buck McKeon (R-Calif.) as Republicans who are so distressed about the sequester’s impact on the military they might do a tax-increasing deal to replace it. Those two names keep coming up because the list of Republicans who feel that way isn’t much longer than two.
- Democrats make a big deal out of the distinctions on how you might raise taxes. They say they do not need more tax rate increases and want to broaden the base or “close loopholes.” Republicans care much less about this distinction than Democrats think. Republicans primarily oppose tax increases because they believe more revenue furthers the expansion of government; concern about the economic effects of high marginal tax rates is secondary. Republicans are not significantly more open to a tax increase through base-broadening than through higher rates. Opposition to tax increases is one of the few issues that unites today’s fractured Republican party.
- Republicans would agree to undo sequestration cuts in the defence department and replace them with deeper cuts to domestic discretionary spending (things like energy and health research and the FBI). Obviously, Democrats would not want to do this.
- Republicans might agree to undo some sequestration cuts in the defence and non-defence areas and replace them entirely with cuts to old-age entitlement programs, with no tax increases. Democrats would not want to do this either.
So what should Democrats do about sequestration? Here are my suggestions:
- One option is to win back the House of Representatives in 2014 and rewrite the budget on their own terms.
- Immigration reform is favoured by elites in both parties and is scored by the Congressional Budget Office as reducing deficits by $US200 billion over 10 years. It’s also something that Democrats want more than Republicans. A package of sequester relief, old-age entitlement cuts and immigration reform might be saleable to many Republicans. I suspect Rep. Paul Ryan (R-Wis.) would be eager. Could Democrats stomach this? Well, how much do they care about getting relief from the sequester cuts? Sure, they’d prefer a deal with a tax increase, but that’s not available so long as Republicans hold the House. The proper question is not, “Is this a good deal?” but rather, “Is this a better deal than just leaving sequestration in place?”
- If Democrats really care about some sort of tax “fairness” as part of this deal, what about including a reform that increases taxes on the rich without raising taxes overall? For example, you could implement the Obama administration’s proposal to cap the value of tax deductions for high earners (raising rich people’s tax bills without raising their tax rates) and use the proceeds for a combination of small tax rate cuts and an increase in the Child Credit. That would make the tax code more progressive while avoiding a tax increase. The tax changes wouldn’t provide any revenue to offset sequestration relief, but they might soothe Democrats’ complaints about entitlement cuts.
I suspect Democrats would reject the deal I’ve laid out, and they actually have a pretty good policy argument on their side: Cutting Social Security to increase defence spending is a bad choice. But that just reflects that sequestration isn’t a horrible policy — but just a bad one. If it were really horrible, it would be worth giving up other things you care about a lot to get relief.
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