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Senate Deficit Negotiators Seek Hammer to Force Action

There’s an obstacle to bipartisan U.S. Senate talks on deficit reduction: Congress’s own history of failing to act without a catastrophic deadline.

A group of senators wants to combine a 2012 framework agreement with a promise of an overhaul next year of the U.S. tax and entitlement systems. They need an enforcement mechanism that’s scary enough to force action without being so frightening that it can’t become law as a fallback position, said Robert Greenstein, president of the Center on Budget and Policy Priorities in Washington.

“There’s no problem-free approach,” said Greenstein, who supports the two-part strategy. His group backs policies that help low-income families.

The quest for an enforcement mechanism that would require lawmakers to follow through on their plans arises from the failure of an end-of-year deadline to prompt Congress to act this year. When Congress returns to Washington after the Nov. 6 election, lawmakers will be trying to avert the so-called fiscal cliff of more than $500 billion in tax increases and $100 billion in automatic spending cuts set to take effect in January.

If Congress does nothing, taxes on income, wages, capital gains, dividends and estates would all rise, imposing an average tax increase of $3,446 on U.S. households, according to the nonpartisan Tax Policy Center. The combination of tax increases and automatic spending cuts -- half in defense -- would push the economy into recession in the first half of 2013, according to the Congressional Budget Office.

$4 Trillion Reduction

The group of senators, which includes Kent Conrad, a North Dakota Democrat, and Lamar Alexander, a Tennessee Republican, wants to come up with a deal in the post-election session on a framework of changes to tax and entitlement policies that would reduce the deficit by $4 trillion over the next decade.

Reaching an agreement would require Congress and President Barack Obama to emerge from the election ready to compromise on some of their principles, such as Republicans’ unwillingness to raise taxes and Democrats’ reluctance to cut entitlement programs. They would have to succeed where Obama and Republican House Speaker John Boehner didn’t in 2011.

If they get an agreement, the details would be worked out in early 2013 and would need to include what Conrad called a “credible” consequence if lawmakers don’t follow through.

‘Horrible Outcome’

“Automatic adjustments in revenue, automatic adjustments in spending, but not the way it was done” with the across-the- board spending reductions, which were “designed so that nobody could live with it,” Conrad said last month. “This one would need to be designed in a way that if it actually happened it would be not a horrible outcome.”

Such an outcome was exactly what lawmakers thought would prompt a deficit-reduction deal over the past two years. In August 2011, as part of an agreement to increase the debt limit, Congress came up with the automatic spending cuts, known as sequestration, as the backstop to a deficit-reduction supercommittee. The panel had the power to create a plan that would have expedited consideration in the House and Senate.

That group deadlocked, leaving the cuts and the rest of the fiscal cliff in place. Election-year politics and the divide between the parties on tax and entitlement policy have prevented an agreement this year.

“Virtually the minute it became clear it was happening, people said: ‘We can’t let this happen,’” said Joe Minarik, a White House budget aide in President Bill Clinton’s administration. The reaction was not “‘we have to come to an agreement,’ but ‘we have to turn it off,’” Minarik said.

‘Never Does’

Framework agreements followed by enforcement are unlikely to work, said Douglas Holtz-Eakin, former director of the CBO.

“That says that process somehow solves the problem,” said Holtz-Eakin, president of the American Action Forum, a Washington group that favors smaller government. “It never does.”

What will compel Congress to act in 2013, he said, is pressure from credit-rating companies and international capital markets to reduce long-term deficits. After the election, he said, Congress should avert the cliff and avoid damaging the economy.

Then, he said, the incoming president, either Obama or Republican candidate Mitt Romney, will have to lead Congress to a bipartisan deal that will likely contradict some of their own campaign proposals.

“You run and you don’t do what you want,” Holtz-Eakin said. “You do what you have to.”

Enforcing a budget agreement requires that both parties think the threat is real and credible, said Minarik, now director of research at the Committee for Economic Development in Washington, a business-backed research group.

“You have to fine-tune it to the point where it in fact motivates action, both because you don’t want it to happen but also because it could happen,” he said. “This is the most difficult thing in the world, to try and achieve this kind of balance between pain and flexibility.”

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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