Hey Everybody, President Obama Is Willing to Cut Entitlements

Last Friday, Gene Sperling, the director of the White House’s National Economic Council, gave a speech that served as a curtain-raiser of sorts for the congressional budget negotiations that kicked off today and were a condition of ending the government shutdown. Sperling talked about the imperative of improving economic growth, but what stood out was his call for more stimulus and his warning that entitlement cuts would be part of any long-term growth strategy. He seemed to suggest a budget deal that would trade one for the other—and didn’t deny this when I asked him.

The White House subsequently reiterated its contention that “any big budget deal is going to have to include significant revenues if Republicans insist on entitlement reforms.” But everyone agrees a “big” deal isn’t in the offing. And an important Wall Street Journal article today provides clues to how Obama and Republicans could cut entitlements in a small or medium-size deal in exchange for the stimulus of lifting the sequester, all without closing any tax loopholes, which Republicans have refused to do.

According to the Journal, Obama has privately expressed to Senate Republicans more flexibility on accepting entitlement cuts without tax revenue than he has publicly:

“At the meeting earlier this month, officials said, Sen. Bob Corker (R., Tenn.) asked whether Mr. Obama would be willing to accept a budget deal without new revenues, one that instead includes some cuts to entitlement programs that the president had previously endorsed. Officials at the meeting said Mr. Obama was open to that approach if it came in a very narrow deal to replace part of the sequester cuts, though he acknowledged that congressional Democrats might not agree.”

This is consistent with what Sperling seemed to be saying, although he did not delve into many specifics. (Sperling did note that the Congressional Budget Office found that the economy would gain 900,000 jobs by lifting the sequester—a nice bit of stimulus.) So how to square this Journal article with the White House insistence that it won’t trade entitlement cuts for sequester relief?

If you read carefully, the Journal piece gives it away:

“White House officials are expected to reject any cuts to entitlement benefits in a deal that doesn’t raise revenue, potentially protecting Social Security and Medicare beneficiaries. But the White House has been more willing to consider cuts in other entitlement programs—such as agriculture subsidies—that both parties have eyed, as a swap for easing the sequester cuts.

The key here is the definition of “entitlements” and the distinction between cutting “entitlement spending” and “entitlement benefits.” Most people consider entitlements to encompass the major social welfare programs: Medicare, Medicaid, and Social Security. But the Journal is using a broader definition that also includes agricultural subsidies. A clearer term for this broader category would be “mandatory spending”—as distinct from the discretionary spending in the budget. (Obama’s 2014 budget includes a laundry list of potential cuts to mandatory spending (pdf), including agriculture subsidies.) If ag subsidies are counted as “entitlements,” Republicans could conceivably win “entitlement cuts”—and Democrats, sequester relief—without anybody touching Medicare, Medicaid, or Social Security benefits.

In fact, hardcore conservatives, the chief obstacle in earlier budget negotiations, might even cheer such a deal. Before Heritage Action bullied House Speaker John Boehner (R-Ohio) to support defunding Obamacare, it was tormenting him over the farm bill, in part because conservatives wanted to cut agriculture subsidies and other corporate welfare contained therein. “The Obama budget actually goes further on ramping down the subsidies than the House and Senate bills do,” Dan Holler, spokesman for Heritage Action, told me. “Certainly we’d support the cuts to the ag subsidies.”

But what if that isn’t enough? What if Republicans insist on cuts to social welfare programs? Here again, terminology is everything. The Journal article has White House officials rejecting any cuts to entitlement benefits. But that still leaves the door open to cuts that don’t affect benefit levels—and Obama lists many of them in his 2014 budget.

As the Journal notes, the scope of the deal under discussion seems to be in the neighborhood of $100 billion, which would offset the sequester for two years. It isn’t hard to cobble together $100 billion of cuts to entitlement programs that don’t run afoul of these various conditions. Here’s my quick stab at it, using the numbers in Obama’s budget and a 10-year budget window:

• Cut agriculture subsidies, including the elimination of direct payments and reduced payments for crop insurance ($38 billion).

• Reduce Medicare coverage of bad debts, by reimbursing providers at 25 percent rather than 65 percent ($25 billion).

• Impose Medicare provider efficiencies, including limits on physician self-referral of ancillary services ($20 billion).

• Reduce Medicare compensation to teaching hospitals ($11 billion).

• Cut waste, fraud, and abuse in Medicare and Medicaid ($4.1 billion).

• Realign Medicare payments to rural providers with actual cost of care ($2 billion).

There: I’ve just come up with $100 billion in savings, with a cool $100 million left over, without cutting anybody’s benefits. Like any successful deal, this one offers something to both sides. Democrats would get the near-term stimulus Sperling called for in the form of $100 billion more spending over the next two years and the ability to say that Medicare, Medicaid, and Social Security beneficiaries were held harmless. Republicans would be able to tout the cuts to entitlement programs, including Medicare, they claim to want and possibly also relief from the defense sequester.

This is just one option, and a deal needn’t be limited to $100 billion or paid for just by cuts in mandatory spending (which congressional Democrats may not go along with). It could also include eliminating tax loopholes, such as the one for carried interest that Representative Tom Cole (R-Okla.) floated to Bloomberg News a few days ago. Or it could include infrastructure spending or the universal pre-K that Obama has called for.

The specifics don’t really matter, at least not on a conceptual level. The larger point here is that budget-deal optimists like Jonathan Chait are correct that, despite the protestations from various constituencies, it’s entirely feasible to piece together something that helps the economy, doesn’t raise taxes, and doesn’t run afoul of anybody’s red line—especially if we’re willing to grant a broad definition of “entitlements.”

    Before it's here, it's on the Bloomberg Terminal.