A Budget Deal is Staring Them in the Face, But Here’s Why Lawmakers Won’t Compromise in 2013

By :: January 15th, 2013

There is an obvious solution to Washington’s perpetual budget crisis. But it is unlikely to happen because all the incentives—both political and economic—are completely wrong.

First, the solution: The core of a deal was framed last December, when President Obama and House Speaker John Boehner were on the verge of a long-term fiscal agreement that would have cut spending by about $1 trillion and raised revenues by roughly the same amount. Sure, Ds and Rs were quibbling about the last few hundred billion, but this, more or less, would have been the compromise.

In the end, the American Taxpayer Relief Act of 2012 raised revenues by about $600 billion (at least as the negotiators counted it) and didn’t cut spending at all (in fact, it may have slightly increased outlays). The obvious next step: Finish the job by agreeing to combine another $400 billion in new taxes with $1 trillion in spending cuts.

To avoid the debt limit crisis, Congress could also extend federal borrowing authority for one year to give lawmakers time to turn those goals into law, then increase it for another year once the spending and tax changes are adopted.

It is an obvious solution. But the chances of Congress and Obama getting to yes are vanishingly small because they confront political and economic incentives that push them to disagree.        

Let’s start with Rule #1 of legislative behavior: Even in the best of circumstances, do the least you can, and do it at the last possible moment.

And Rule #1 of presidential behavior: It is far better to never try than to try and fail.

Add to that the specific issues raised by 2013 budget politics.

First, the raw electoral politics:

As many analysts have noted, the vast majority of House members are elected in districts that are deeply partisan. In 2012, nearly one-quarter of the House—104 members—were elected with 75 percent of the vote or more. Three-quarters of them were Democrats.  On the other side of the aisle, only 39 Republicans (of 234) were elected with less than 55 percent.

It is thus not surprising that members of congress stay up nights worrying about how to make their party base happy, not how to capture the political center. To be primaried has become the most popular new verb on Capitol Hill.  

Then, there are skewed policy incentives: Obama has teed up initiatives such as immigration and gun control that may stymie GOP attempts to broaden its appeal to independent voters. As a result, Hill Republicans may want to keep the president pinned down on fiscal issues for as long as possible, forcing those other matters to at least share the stage.

For their part, Democrats have plenty of incentive to stall cuts in planned Medicare or Social Security spending, issues that still have tremendous resonance with their base. The Democrats’ price: big GOP concessions on more tax hikes.      

Finally, there are the economic disincentives to deficit reduction.

Short-term economic rewards for slashing the deficit are hard to see. Real, inflation-adjusted interest rates are negative, despite the recent bump in yields. Even fiscally conservative lawmakers say privately that with money so cheap, it is impossible to make the case for deficit reduction. The story they’d normally tell—that massive government debt drives up borrowing costs for everyone—is not credible in a zero interest rate environment.

With little public support for the spending cuts and tax hikes needed to cut the deficit, few lawmakers are willing to make those tough votes absent a clear, easy-to explain, economic payoff.

There are many reasons why the bond market is failing to send the interest rate signals deficit hawks expect. The U.S. economy remains sluggish, the Federal Reserve is keeping rates low by buying trillions of dollars of debt, and for all its troubles the U.S. remains the safest investment in the world. The bottom line, though, is that money is cheap, despite trillion dollar deficits.    

Add it all up, and it is no wonder politicians are so reluctant to make a deficit deal that is staring them in the face.

7Comments

  1. foosion  ::  3:36 pm on January 15th, 2013:

    “Finally, there are the economic disincentives to deficit reduction.” that’s why spending time on deficit reduction rather than growth is a mistake at this time.

    At a time of slow economic growth, high unemployment, almost record low interest rates, crumbling infrastructure, why is it rational to focus on cutting spending and increasing taxes, which will hurt growth and employment and likely make the long-term deficit worse? Should we wait to fix our roads, bridges, schools, etc., etc., until it would be much more expensive?

    Medicare and Social Security are incredibly popular across the political spectrum. Cuts are opposed approximately two-to-one by just about every major identifiable group. To belittle opposition to cuts as “issues that still have tremendous resonance with [the Democratic] base” is misleading.

  2. Michael Bindner  ::  8:53 pm on January 15th, 2013:

    Most importantly, the entire health care payment system in the private sector may be blown up by reform. If subsidies are inadequate to get people to buy insurance or they simply calculate that they don’t need it to get care, the entire Act will be a failure. If the financial markets even smell this trend happening (and why wouldn’t they), then either single-payer will be enacted (either federally or state by state) or a public option will be created. Both of these options require a huge tax increase, probably featuring broadening the base to all value added, rather than simply the value added by payroll – and the amount extra to fix Medicare and make Medicaid a decent program will be pocket change.

  3. AMTbuff  ::  1:31 am on January 16th, 2013:

    “the entire health care payment system in the private sector may be blown up by reform. …the entire Act will be a failure.”

    No, the entire Act will be a success. Its objective was exactly what you describe: destruction of private insurance, paving the way to voter support for nationalized health care. That’s why Democrats were less than unconcerned about obvious defects in the law. All the defects merely accelerated the successful destruction of private insurance.

    The only problem proponents failed to consider is that the government will be out of money by the time private insurance is fully destroyed. Oops.

  4. Tax Roundup, 1/16/2013: Iowa legislators to push Alternative Maximum Tax? Also: new home office deduction option. « Roth & Company, P.C  ::  10:09 am on January 16th, 2013:

    […] Howard Gleckman,  A Budget Deal is Staring Them in the Face, But Here’s Why Lawmakers Won’t Compromise in 2013 (TaxVox) […]

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