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Deal, or no deal

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Michael Gerson
June 17, 2011
— The most consequential recent political debate did not take place in New Hampshire. It is being held at Blair House, where Vice President Biden is convening bipartisan negotiations for an increase in the debt limit. Biden, by most accounts, is conducting those talks fairly. House Majority Leader Eric Cantor describes them as "constructive." Important, if true.

For the first time, Senate Republicans describe to me the outlines of a possible deal: a package of immediate and specific budget cuts; budget caps reaching out five years to reassure conservatives that tough budget decisions will be made in the future; Medicare reforms short of the House approach; no tax increases -- a Republican red line -- but perhaps additional revenue from the elimination of tax expenditures.


Senate Minority Leader Mitch McConnell seems particularly intent on reaching a Medicare agreement different from Rep. Paul Ryan's proposal. An incremental approach would allow Republican senators to say they confronted the problem, while also allowing them to distance themselves from the unpopular House plan.


President Obama, in turn, is presented with one of the largest decisions of his re-election campaign: Deal, or no deal?


The easiest, most obvious political path would be to put on the appearance of negotiations, to wait until the end of the process, to put a significant (but not dramatic) package of budget cuts on the table, and to dare Republican lawmakers to destroy the credit of the country by rejecting it.


But the dismal economic news of the last month may change this political calculation. It is far easier to defend a slow recovery than it is to defend a stalled recovery. And a second economic dip would be a mountainous obstacle to a second term. Obama may require an economic strategy beyond Medicare scare tactics.


Linking arms with House Speaker John Boehner and McConnell in a grand budget deal -- complete with East Room signing ceremony -- would at least have a chance of changing Obama's economic narrative. He would demonstrate that he can work with Republicans. Serious deficit reductions might build his credibility with independents. And Obama might buy a period of patience on the economy.


Democratic leaders recently declared Medicare reform off the table. Senate Majority Leader Harry Reid described the protection of this entitlement as "our top priority." Such a warning shot, however, would not have been necessary unless the Biden group was contemplating Medicare reform. Reid's message was directed not at Republicans but at the administration. Clearly some Democrats don't want to be disarmed of their Medicare club, even by incremental reforms.


But there is only one Democrat who counts in the Blair House negotiations -- the president. Like presidents before him, he will do what is in his perceived interest.


Part of the determination of this interest depends on an economic judgment. Obama's more liberal economic allies contend that decreased government spending would undermine short-term economic growth. The American economy needs stimulus, not ill-timed austerity.


Other economists argue for the short- and medium-term benefits of a deficit reduction deal. Businesses would gain confidence that the deficit problem won't be addressed by massively increased taxes. Credit markets would find it reassuring that the federal government is not completely paralyzed.


And Obama could take a deal without abandoning the stimulus argument. The administration has released the trial balloon of including temporary payroll tax cuts in a budget agreement - similar to what President Bush did in 2008. "Republicans would have to decide if their opposition to 'fiscal stimulus' includes opposing temporary tax relief," says Stanford's Keith Hennessey.


The legislative path for a grand deal is admittedly difficult to chart. It is not clear that Boehner could deliver the votes of the most conservative House Republicans. So he would require some Democratic support. But any agreement on Medicare would make Democratic approval difficult for Obama to secure.


Obama's largest challenge, however, is that his economic problem may be moving beyond solution. The immediate, real-world effects of a budget deal would be positive but limited. It would address some worries and have some stimulative effect. But economic liberals are correct that a stimulus large enough to significantly reduce unemployment would require hundreds of billions of dollars over the next year. And this would undo the deficit reductions contained in the rest of a package.


Right about now, it is dawning on the administration that the economic conditions for next November's election are just about baked. Which will encourage either resignation to partisanship -- or an attempt at economic boldness.



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