Fiscal Cliff Negotiations are getting worse

On Sunday, The Washington Post reported that negotiations between Speaker Boehner and President Obama are moving forward. Unfortunately, they are moving in the wrong direction. Here are the highlights, with why they are bad in italics:

 House Speaker John A. Boehner has offered to push any fight over the federal debt limit off for a year, a major concession that would deprive Republicans of leverage in the budget battle but is breathing new life into stalled talks over the year-end “fiscal cliff.”

The debt ceiling is a major negotiating point for Republicans with President Obama. It’s the only reason the Budget Control Act (BCA) is in existence. Inadequate though it is, the BCA is the first bipartisan effort to remotely slow the growth of federal spending in years. With another debate over raising the debt ceiling coming in a few months, the Speaker is basically giving away an advantage to the President in future debt discussions.

The White House rejected the offer, saying it would raise too little cash to significantly dent record budget deficits and do nothing to extend emergency unemployments [sic] benefits into the new year, according to a Democrat familiar with the talks.

The unemployment benefits have been long known to be ending. They are not “emergency” spending. This is a subtle form of media bias. Also, this seems to be a new addition to talks from Democrats – unemployment benefits seem to be making more news in recent days and weeks. A tactic to put pressure on Republicans?

Furthermore, no amount of “cash” raised by tax increases is going to dent “record budget deficits.” The President’s wish of $1.6 trillion (now $1.2 trillion) over 10 years will cover less than 4% of expected spending over that same time period. Given the growth of spending since 2000, a 4% cut in future spending – which is expected to go up significantly – isn’t a serious effort at deficit reduction.

“Recognizing the importance of raising tax rates is a big, positive and important step,” said former White House economic adviser Lawrence Summers, who emphasized that he was not speaking for the Obama administration.

“The evaluation of any deal should depend on how much total revenue is raised, whether adequate demand is maintained to sustain the recovery and whether we are restoring confidence or just marking time until another debt-limit crisis,” Summers said.

To answer Summers’ first point, see my last point. Regarding the second point Summers is making, he is dead wrong – the evaluation of a deal should depend on how many dollars are cut from the bloated federal budget in order to help strengthen the economy and prevent more crushing debt from being put on the shoulders of the next generation. How much revenue is raised (AKA how many more tax dollars go to Washington) is not a solution.

In exchange for the higher rates for millionaires, Boehner is demanding changes to federal health and retirement programs, which are projected to be the biggest drivers of future federal borrowing. Boehner wants $1 trillion in total savings, starting with adoption of a less generous way of calculating inflation that would save $200 billion over the next decade — about two-thirds of it by reducing Social Security cost-of-living adjustments.

This is the only semi-good news in the entire article. Health care spending is the biggest problem in the medium and long-term for the federal government, and needs to be significantly reformed. Unfortunately, the Speaker’s efforts are woefully inadequate.

Obama has offered $600 billion in spending cuts, with only $350 billion coming from health programs and none from Social Security. Many congressional Democrats adamantly oppose dragging the program into the year-end talks. [Note: The President has since offered very modest tweaks  to Social Security and Medicare as part of a “balanced” approach of over $1 trillion in tax increases and about the same in spending reductions, all over 10 years.]

$1 trillion in spending cuts over 10 years is less than 2.5% of what we are going to spend in that time period. It’s not even a “cut” in spending. It’s a reduction in the growth of spending.

Still, if Republicans make an offer on higher tax revenue that Democrats consider big enough, senior Democrats have signaled that they are open to the change in how inflation is calculated for entitlement programs, known as chained CPI.

In other words, increasing tax rates to make up for Washington’s undisciplined spending habits might be enough to allow bipartisanship on a modest-at-best reform to programs that need drastic change. The biggest thing this does is allow Washington to pretend we have a revenue problem instead of a spending problem.

White House officials last week dropped their tax demand to $1.4 trillion and may be willing to go lower, Democrats said. [Note: On Monday, the President  offered to take only $1.2 trillion of your dollars in more taxes, something seen as a big sacrifice by his party.] But setting the income threshold for tax rate hikes at $1 million, as Boehner proposed, would sacrifice too much money, they said. Democrats argue that a threshold of $375,000 or even $500,000 would be more appropriate.

The functioning word above is “sacrifice.” Apparently, not taking more of your hard-earned money is a sacrifice the government makes if it doesn’t raise rates.

As always, the fiscal cliff comes back to two simple realities: We have a spending problem, not a revenue problem, even if Washington doesn’t want to admit it. Second, Washington doesn’t have the intestinal fortitude to stick to spending reductions it enacted less than 18 months ago – so why should we trust the new deal would last any longer than the old one?