How to Avoid Sequester and Give Both Parties What They Want

By :: February 27th, 2013

I would like to propose a simple plan that would let Republicans and Democrats avoid a blunt, across-the-board sequester that fails to set priorities. It would give both parties something they want without abandoning their core principles. And it would strengthen the party making the proposal by putting the other on the spot if it fails to move toward a moderate compromise.

Republicans should offer to let the president meet the sequester’s deficit targets through his choice of spending cuts, including from entitlements. Yes, they would cede some power over a moderate share of total spending, but they would retain their primary goal: forcing Democrats to tackle the spending side of the budget.

Democrats should replace their demand that the sequester include tax increases with a simpler requirement that the rich shoulder their fair share of any spending reductions. Yes, Democrats would give up their goal of balancing spending cuts with tax increases, but they would retain their more basic aim: progressivity.

To understand why these strategies would work, we have to go back to the root causes of the impasse. Each party is fiercely fighting to compel the other to ask the middle class for the inevitable—to give up something to restore balance to the budget. But each considers it political suicide to take the lead. Just think back to the presidential campaign, when Barack Obama and Mitt Romney indicated support for Medicare cuts, only to be viciously attacked by the other.

Republicans want all deficit reduction to come from direct spending but recognize that most of those outlays are in so-called mandatory or entitlement spending, which occurs automatically with no new vote required by Congress.

Democrats believe the rich have made out quite well in recent decades and should bear a significant portion of any deficit reduction. They feel it is unfair and unbalanced to exclude tax subsidies, which tend to favor high-income households, from any deficit reduction plan.

To an economist of any stripe, deciding which programs to fix according to the labels we place on them—direct spending or tax subsidy—is silly. In truth, Republicans should be as willing to cut tax subsidies as direct spending, since cutting either would reduce government interference in the economy.

By the same token, Democrats should be just as willing to cut spending as tax subsidies, as long as the wealthy bear a fair share of the burden. Since Democrats end up with smaller government either way, they should focus on progressivity, not the more semantic debate over cuts in tax subsidies versus direct subsidies.

That’s where my compromise comes in. If Republicans would simply empower the president to reallocate the spending cuts, they could eliminate the meat axe of the sequester. Yes, they would be giving up some power, but look how they came out of the last debate, with only tax rate increases and a bloody nose. Forcing the president to choose enables Republicans to run later on how they would have chosen better.

As for Democrats, why not aim their sights at their real target: progressivity? If Republicans let Obama allocate spending cuts, Democrats could get the same progressive distributional outcome as they’d get through tax hikes. And they, too, will have achieved their principal objective. To move beyond budgetary gridlock, each party must figure out what it can give up to get what it really wants. My plan isn’t perfect, but it allows each party to achieve its goals, and it is a big improvement over sequestration.

4Comments

  1. foosion  ::  5:36 pm on February 27th, 2013:

    We need counter-cyclical fiscal policy. Cutting spending will depress the economy, hurting growth and debt/GDP. It’s counter-productive.

  2. Michael Bindner  ::  7:24 pm on February 27th, 2013:

    Henry Aaron would disagree with you on Medicare and Social Security cuts for the rich, because he would not want these to become low income programs.

    I still think we should kick this down the road to give Tax Reform a try and wait and see how health care reform shakes out. Until we are sure it won’t blow up in our faces (and no one talks about this, which means they think it will happen or don’t want to be responsible for causing it), talk of minor cuts in health care spending are silly. What is truly needed is more in health care revenue – and the GOP will go with it if it means the continuation of private insurance rather than single payer.

  3. Vivian Darkbloom  ::  5:06 am on February 28th, 2013:

    Steuerle:

    “To an economist of any stripe, deciding which programs to fix according to the labels we place on them—direct spending or tax subsidy—is silly”.

    That may not be perfect, but it sounds about right.

    Gleckman:

    “In much public discourse, direct government aid for the poor is easily dismissed by the pejorative “welfare.” Yet, spending-like subsidies administered through the revenue code provoke far less outrage. This is true even though many of these tax preferences are economically indistinguishable from direct spending and often add far more to the deficit.”

    In other words, a “tax subsidy” that reduces the tax burden of person who are notwithstanding the “subsidy” net payers of tax, is not only “spending”, but it is presumably also “welfare”.

    (See AMT’s comment to Gleckman’s prior post—this assumes tax rates are exogenous and they are not. To take an extreme example, if an individual’s tax rate is 100 percent and a “tax subsidy” reduces the effective rate to 75 percent, the government is not only “spending” on that person but we should be morally outraged because that person is functionally equivalent to a welfare recipient).

    Blinder (and presumably Aaron):

    “Henry Aaron would disagree with you on Medicare and Social Security cuts for the rich, because he would not want these to become low income programs.”

    Does this means that making direct payments of Social Security and Medicare to those who are net financers of the program (that is, taxes paid exceed benefits received), or to those who are otherwise not in need of assistance from those programs (that is, benefits exceed taxes paid even though the person is not “in need”), is neither “spending” nor “welfare”?

    It appears from the above that the definition of “spending” and/or “welfare” (or “tax”) may well depend solely on what is ideologically convenient for one’s distributional preferences (which most often simplistically relate to income rather than generational cohorts).

    The lesson, I think, is that “spending”, “tax” and “welfare” cannot be defined sensibly defined in isolation, but doing so sure helps to rhetorically obfuscate things.

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