White House Should Be Ready for a Debt-Limit DealPeter Orszag
Nov. 7 (Bloomberg) -- Barack Obama’s victory last night reflects discipline and foresight on the campaign trail. Now let’s hope that, back in Washington, his staff was exercising similar discipline with regard to the fiscal cliff, the more than $600 billion in tax increases and spending cuts scheduled to take effect at the end of the year.
Obama has an opportunity to make necessity his friend and cut a path-breaking fiscal deal -- but doing so requires him to navigate several major obstacles.
The election results were not particularly helpful for the prospect of getting a deal done before the end of the year. Despite the president’s winning margin in the Electoral College, the political configuration is basically status quo: a Democrat in the White House, Democrats controlling the Senate and Republicans running the House.
Thus, no one was really punished for the debt limit debacle of 2011. And, as we saw most vividly at that time, the form of divided government we have returned to office doesn’t always work so well.
The crucial obstacle at this point is the controversy over what to do with the expiring Bush-era tax cuts. The White House has insisted that for people with incomes above $250,000 the cuts should vanish at the end of the year, while the House Republicans have insisted that all of them be extended.
One idea that has been floated to resolve this impasse is to raise the $250,000 income threshold to, say, $1 million, so that all the tax cuts for people with incomes below $1 million would be extended, and the rest would expire. Earlier this week, however, John Boehner, the speaker of the House, said he would not support that option.
Nothing in the election results should lead us to believe that Boehner and the House Republicans will change course. After all, they lost only a couple of seats (as of Wednesday morning) and so are unlikely to interpret the election as a major rebuke.
The White House, therefore, has three options. First, it could drive us temporarily over the fiscal cliff, let all the cuts expire, and aim for a deal in January with the clean slate that would occur once all the tax cuts are gone. This approach would create maximum anxiety and uncertainty, though. It’s not clear how quickly in January a deal could come together.
Second, rather than insist on raising marginal tax rates above $250,000 in income, the White House could suggest scaling back tax breaks for that cohort. House Republicans would be much more amenable to this type of approach. Still, it would be a major concession from a White House that is presumably feeling vindicated by the election. And it is always hard to trim tax expenditures such as the mortgage interest deduction and state and local tax preferences -- especially now, at a moment when the economy is still recovering from a housing-led downturn and state and local governments still face significant deficits that need to be closed.
Finally, the White House could push for a placeholder tax cut while negotiations are ongoing. The “tax reform refund” I proposed in a previous column should be easier for the Republicans to swallow than any tax-expiration scheme. This refund would amount to $1,600 a year for anyone who works or receives Social Security benefits, and it would remain in place until a deal could be reached or, failing that, until the economy recovered more.
The other requirement for any deal -- entitlement change -- is just as challenging. A team put together by the Center for American Progress, which included me, has proposed a variety of steps to continue slowing the growth of health-care costs, but almost all of these would be impossible to get through the House, with the possible exception of our proposal for medical-malpractice reform.
So the most promising approach may be to compromise on Social Security -- even though it is not a significant driver of our long-term deficits.
This would have several benefits for the White House. For one, Democrats should leap at the chance to restore solvency to the program while keeping private accounts off the table. (That may not always be a possibility.) Raising the $110,000 cap above which the payroll tax no longer applies is perhaps the single most popular way to raise revenue. And, by making the annual Social Security benefit more progressive, the administration could address the growing gap in life expectancy by income and education in the U.S.
What’s more, it is possible to enact but defer Social Security changes, as history has shown. Consider that the gradual increase in the normal retirement age, which did not begin until 2000, was enacted as part of reforms passed in 1983.
Today, given the still-weakened state of the labor market, it is better to enact fiscal authority that is delayed, rather than immediate -- and Social Security reform offers a good way of doing that. (Ideally, the delayed fiscal austerity would be enacted alongside another round of stimulus, in a “barbell” fiscal policy.) And finally, the political value would be high because Social Security looms larger in people’s minds than it does in the numbers. Reforming it would give the administration fiscal credibility disproportionate to the actual impact on the long-term deficit.
Which specific reforms to Social Security should the White House embrace? There are many sound options. Not surprisingly, I am partial to the plan that the economist Peter Diamond of the Massachusetts Institute of Technology and I have proposed.
It would be nice to think that over the past couple of months all of them have been the focus of White House staff discussions.
(Peter Orszag is vice chairman of corporate and investment banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. The opinions expressed are his own.)
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