Sunday, November 20, 2011

Budget Reduction Act - High Stakes Poker?

I'm still trying to figure out this deficit reduction exercise.  The Budget Committee has a few more days to create and pass their plan.    There needs to be seven (of 12) votes to pass anything.   That would result in a bill that would go to the House and Senate for an up or down vote.  No amendments.  No filibusters.  Simple majority passes or rejects it.

Was this committee a set-up?  If so, who set it up?  The Democrats or the Republicans?  At first glance, it looks like the Republican got dealt all the aces.

The point is to try to balance the budget (at least to greatly reduce the deficit) in a reasonable time period.  The Democrats are willing to include cuts, but also want to increase revenues (taxes mainly).  The Republicans only want cuts.  Most have signed a No Taxes pledge and that's where they've been sticking.  

The deal starts with cuts.  There are no taxes or other revenue increases.  And if they fail, there are automatic cuts, no taxes.  So, as I see it, the Democrats have already given up most of the concessions the Republicans want.  (Well, they want the Democrats to give up more.)  But the Republicans haven't given up anything serious.  OK, some don't want cuts in the military and there would be some big ones if the committee fails.  But it's cuts.  If they want to keep the military whole, they'll have to agree to some revenue increases.

But if they don't agree,  automatic cuts (and no revenue increases) begin.

After looking at a number of websites that explain the Act, I decided to borrow part of this summary from the blog of Keith Hennessey, a Research Fellow at the Hoover Institution [a conservative think tank] at Stanford University, and a Lecturer at the Stanford Graduate School of Business and the Stanford Law School.
  • If this new Joint Committee legislative process fails to result in a law, then there will be no tax increases and there will be triggered $1.2 T of across-the-board spending cuts in discretionary spending, Medicare, farm subsidies, and a few smaller entitlements. These triggered spending cuts would hit defense more deeply than other types of spending.
  • The additional deficit reduction could include tax increases, but only if:
    • 7 of 12 Members of a new Joint Committee of Congress agree to raise taxes, including at least one Republican Member of the Committee;
    • and a majority of the House and Senate vote for the Committee’s recommendations;
    • and the President signs the bill into law.
 So, was this some slick deal the Republicans pulled on the President?  After all, the default is big spending cuts and no taxes, just what the Republicans want.

Or did Obama pull one over on the Republicans?  I'm not sure, but there are some signs that this might fail in Obama's favor.  The cuts don't automatically begin until 2013, and Congress can pass legislation between now and then to stop or change the automatic cuts.

And while the Republicans can argue that the Democrats refused to compromise, anyone looking at this can see that it's full of the cuts the Republicans wanted and that there are NO taxes or other revenue increases that Democrats want.  That is, no Republican compromises.

And a lot of folks are saying the automatic cuts, during a recession would be a disaster.

    Here's today's (Nov. 20, 2011) Wall Street Journal:
    However, in the wake of the committee's expected failure, the additional spending cuts—including $600 billion from the Pentagon—don't take effect until 2013.
    Sen. Jon Kyl (R., Ariz.) said on NBC's "Meet the Press" that he didn't believe Congress would allow those cuts to take effect in the defense budget because of the dire warnings of its detrimental effects.
    However, President Barack Obama and House Speaker John Boehner (R., Ohio) have opposed attempts to mitigate or tamper with the spending-cuts mechanism, which once had been considered a powerful incentive for the panel to reach a compromise.
    But the one-year time lapse before the enforcement mechanism kick in reduced the sense of urgency and eased pressure on the panel.
    So, if the intent of the drastic cuts that are automatically triggered if the committee doesn't create and pass a bill (or the Congress doesn't pass it or the President doesn't sign it), was to force the committee to pass something, it doesn't seem to be working.

    And now with an election coming up in less than a year, how is the electorate going to evaluate who caused the problem?  The Democrats who wanted to raise revenue, but were willing - from the git go - to cut some of their cherished programs?  Or the Republicans who started with the Democrats taking huge cuts, but were never willing to make any revenue increasing compromises until the very end, when they offered a very symbolic revenue compromise, but with conditions that seemed to canceled out the benefits.  Here's a New York Times report on the Republican proposal.

    And CBS News reports that 64% of Americans support tax increases on the rich to lower the deficit.  Perhaps it's beginning to be clear that the Republicans are less interested in decreasing the deficit than they are interested in keeping their rich supporters rich and untaxed, and in chipping away at government so their rich friends can do whatever they want - whether it's increasing credit card fees or extracting resources - without pesky governmental regulations intended to keep the environment clean and workers getting a livable wage and not getting injured or killed on the job without any health insurance or pension.

    Maybe even the police monitoring the Occupy demonstrators are recognizing that their jobs and pensions are vulnerable too, that they are part of the 99%.  Maybe this whole exercise was simply to expose the protectors of the 'job creators' for what they are.  And perhaps Obama couldn't lose this game.  If they got Republicans to raise taxes in the committee, that would have been good in general.  If they couldn't, then it would give the public one more example of the Republicans' "heads I win, tales you lose" strategy. 

    Only time will tell.  Perhaps the Republicans haven't learned from the housing crisis where consumers were lured in with deals that were too good to be true, only to have the rug pulled out from under them.   Perhaps this committee - already stacked with cuts and no taxes - looked too good to resist.  They thought they couldn't lose.  But maybe they have.

    Or maybe not.  We'll see.


    1. Does Alaska as a state have her own budget? I would take a look at it if it was possible.

      I am more interested in local issues than central (federal in the US) issues. It is also interesting but my dream is to work in a local government as economist. Too bad there are severe cuts in the public sector in Hungary.

      1. Yes. Each state has its own budget. Each city too. In Alaska we are doing well because we have so much oil. It's just luck, nothing special we do.

      2. We have similar system in Hungary too. Local government and cities have budgets, I am not sure about counties, because here county councils have been weak since the change of regime, however I guess they still do some sort of budget. However here being indebted is more general.

    2. Most if not all State and Local governments are required to have a balanced budget in the US.


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