Tuesday, August 2, 2011

The Democrats' Powerful Negotiating Advantage

Some otherwise-savvy people are obsessing on how awful the debt ceiling/budget-bending deal is, and are especially hung up on the fact that the Deal contains no new taxes (whether cast as "new revenues," "canceling tax expenditures," "revenue increases," "closing loopholes," "tax reform," etc.). In reality, however, the Deal not only has new taxes embedded in it, but it's slanted heavily to the Democrats' advantage in future negotiations. Both the new taxes and the negotiating advantage are so obvious to me that I almost suspect some Progressives feel such a disconnect between the nearly infinite promise Obama displayed in the heady days of 2008, and his actual, imperfect performance when confronted with the actual demands of office, that they are emotionally unable to admit that, this time around, Obama may have negotiated a really good deal for Democrats.

Don't get me wrong: I agree wholeheartedly that, emotionally, this doesn't FEEL like a good deal for Democrats. But as Stephen Colbert explained brilliantly in his very first show, it's conservatives who make decisions based on how the truthiness feels; if liberals have anything going for them, it's the ability to understand and accept truth even when it doesn't feel like truth. So, as a professional mediator who trusts that liberal prefrontal cortices are beefier than liberal amygdalas, let me try to explain why Democrats are in a pretty darn good negotiating position right now:

Let's start with the reasonable assumption that Congress doesn't have the stomach to get into a huge new budget/tax brouhaha before the Joint Committee created by the so-called "Satan Sandwich" has a chance to meet and make its recommendations. (Avoiding such a fight is why Congress punted to a committee in the first place.) That means that the Committee's likely outcome is the main variable affecting the final outcome.

There are three broad options available to the Joint Committee: a mutual agreement that may affect entitlements but also raises taxes; a deadlock; or a Democratic cave-in. (Note that I didn't consider a G.O.P. cave-in; it's not their style.) Let's look at each option in turn:

OPTION ONE: The Committee does its job and agrees on a mutually-painful package of additional spending cuts (possibly including entitlement "reforms" of some kind) plus tax reforms, including closing loopholes and canceling tax expenditures, to increase revenues.

Liberals will disagree about whether any Democratic concessions were reasonable, and it is entirely possible that the Democratic negotiators will surrender too-large cuts to social programs or entitlements -- but any deal that raises taxes unquestionably will infuriate the GOP's Tea Party base and would seriously compromise its ability to demagogue budgets/deficits/Big Gubmint in the 2012 election. Regardless of how the Democratic base feels about Democratic concessions, any deal that allows the Dems to claim equal credit for fiscal responsibility, while stoking Tea Partiers into apoplexy over the GOP "traitors" who've whored away their tax-purity pledge, would be so palatable to independents (and bond-rating agencies) and so destabilizing to Republicans that Obama would almost be guaranteed reelection and Nancy Pelosi could well be restored to the Speaker's chair.

That's why I've referred to even a tiny tax increase as a "wafer thin mint": the GOP's House majority would explode if they brooked it. And if Dems control the House, then under the Constitution they get to initiate all spending, and the remaining nine years of this illusory "ten year plan" would suffer terminal defenestration.

Option One: net win for Democrats.

OPTION TWO: The Republican delegates to the Joint Committee refuse to do anything that the Tea Party might construe as "raising taxes." The Democratic delegates refuse to do anything liberals might consider harmful to entitlements. Both sides hang tough. The Joint Committee stalemates.

In the event of a stalemate, the "triggers" set forth in the Satan Sandwich automatically go into effect. Those cuts hit both sides -- but they don't hit Democrats in any vital organs. In fact, in electoral terms, they hurt Republicans more than they do Democrats.

(I don't want to get bogged down in discussions of cuts here, but in brief: the "triggers" include nasty cuts in domestic discretionary spending -- but, under the explicit terms of the Deal, Social Security and Medicare are exempt from those cuts, except for a 2% reduction in payments to providers, who primarily are a Republican constituency. But while the Democrats' key constituencies among Social Security and Medicare recipients would be relatively undisturbed, key Republican constituencies -- defense contractors and Tea Party-dense, military-dependent communities located primarily in conservative states and districts -- will be subjected to deep, automatic cuts.)

But the action's not on the cuts side of the equation, folks: it's on the revenues side. Republican negotiators entered the debt ceiling negotiations under the assumption that current tax rates were the baseline for measuring the next decade's tax impacts. If a deal simply continued current rates for the next ten years, it was "revenue neutral" in their eyes.

But that's not what current law says! Current law slates the 2001 and 2003 Bush tax cuts to expire at the end of 2012. What Republicans considered a "tax neutral" baseline actually would have been a huge tax cut when compared to the rates current law prescribes from 2013 forward. And that, in a nutshell, is why Obama and Boehner couldn't agree on a deal that raised taxes today: they don't even agree on what ruler to use.

But the law is the law, and the truth is the truth: if Congress is so dysfunctional that it does absolutely nothing but name post offices between now and 2013, tax rates will increase dramatically. Obama didn't need to gain a single concession from the Republicans in order to win "new revenues"; to both prevent a Presidency-jeopardizing economic collapse and win the "new revenues" he said he wanted, all he needed to do was exit the negotiations with a deal that prevented the nation from default and left current law in place.

Let me repeat that, because people don't seem to realize its importance: Current law slates the 1991 and 1993 Bush tax cuts to expire at the end of 2012. Obama didn't need to gain a single concession from the Republicans in order to win "new revenues" -- all he needed to do was exit the negotiations with a deal that prevented the nation from default and left current law in place.

Which, of course, is what this deal does.

So here's what Option Two (Joint Committee deadlocking) really does: it imposes spending cuts on both domestic spending that Democrats favor and defense spending that Republicans fetishize; it nevertheless protects the entitlements that are totemic to the Dem base; in electoral terms, it gores the Republicans' ox more than the Democrats'; and it results in automatic, across-the-board tax increases totaling roughly $3.5 trillion over the next decade.

Option Two: win for Dems.

[UPDATE, 8/3: Dave Weigel confirms here and here that the bill itself mandates current law, not current rates, as the baseline. See comments for discussion of some interesting, I think unintentional, consequences of this.]

It's hard to imagine even the most azure canine conservaDem not getting giggly over this kind of negotiating advantage. If the Committee reaches agreement that includes tax hikes, the GOP loses its base. If the Committee deadlocks, taxes return to pre-Bush levels and the budget balances itself in just a few years. Those are two very good outcomes for Dems.

Or, of course, there's what the Left's Cassandras expect to happen:

OPTION THREE: The Republican delegates to the Joint Committee demand both spending cuts and entitlement "reforms" that painfully cut benefits to the poor and the elderly. The Democratic delegates ask for tax hikes in return, but the Republicans steadfastly refuse. Despite the clear advantages that simply announcing "hung jury" would bring them, the Democratic delegates instead simply cave in.

There's no real reason why they would cave in, except for the fact that (as Paul Krugman keeps saying and Glenn Greenwald has painstakingly cataloged) Obama and those in his camp actually are closet Republicans who love spending cuts and know nothing about John Maynard Keynes and don't believe in fiscal stimulus and have decorated their private bathrooms with little framed cocktail napkins signed by Arthur Laffer and probably agreed with Ralph Nader back in 2000 that there was no difference between Al Gore and George Bush and, I suppose, think that John Kerry really was a coward in Vietnam, too. [UPDATE 8/03: In fairness to GG and PK, yes, I'm speaking hyperbolically -- but not as hyperbolically as I wish.]

In this view, it's a given that the Democratic delegates will give away the farm in exchange for absolutely nothing of value, because that's what Krugman and the folks at FireDogLake say Obama Dems always do. Option Three is inevitable, because Democrats suck and Obama is governing "to the right of Richard Nixon" and his supporters are "the dumbest motherfuckers in the world." And then, even though Barack Obama retains the power to veto a bill that gives the Republicans everything and the Democrats nothing, he doesn't veto it. Because, again, he's a terrible negotiator who secretly hates liberal ideals anyway.

Option Three: Democrats suck, and (as the Teapartiers have said all along, but in reverse) Obama's a Manchurian candidate bent on selling us out, so of course the Republicans win, as always. Sigh.


Of course, the endgame probably won't be decided by the Joint Committee at all. The Committee will meet and issue a report, but there's plenty of time for the parties to negotiate a different compromise after the Committee reports but before either the automatic triggers or the automatic tax hikes go into effect. And there's some legitimate fear, based on Obama's past less-than-steely negotiating history over the public option and the last extension of the Bush tax cuts, that here is where a bad deal for Democrats may be made.

But the contours of any alternative agreement will be shaped by the likely outcomes of the "triggers" scenario -- what we mediators call the Best Alternative to a Negotiated Agreement, or BATNA. In other words, neither party is likely to negotiate an agreement that's worse than the outcome of NOT reaching an agreement.

Under the deal President Obama just negotiated, Democrats' BATNA is a survivable set of spending cuts, a diminished Pentagon budget that hurts Republican home states and districts, automatic tax hikes that almost guarantee a balanced budget in less than a decade (reinforcing the Democratic narrative that, as Bill Clinton showed, Democratic Presidents are better fiscally than Republican ones), and a Republican base that's furious -- as an election looms -- at its own representatives for allowing those tax hikes to occur.

With a good BATNA like that, even poor Democratic negotiators almost can't help but cut a good deal for themselves. And (flipping around and looking at things from the other perspective), with a lousy BATNA like theirs, even the hardest-nosed, most regressive Republican negotiators have little choice but to accept some sort of spanking -- for instance, by letting Dems raise taxes on the richest Americans while preserving low tax rates for the middle class.

Yes, Option Three might happen -- if D.C. Dems are the utter fools a few pundits claim them to be. And if they let themselves be beaten that badly as this plays out, I'll be among the first to label them fools.

But Options One or Two are far, far, FAR more likely. And instead of wrapping themselves in sackcloth and ashes, crying in woe and beating themselves up for their leaders' factitious sins, Progressives would be wiser to join ranks and work together to pressure Reid and Pelosi with one simple, bridge-building demand: that the Democratic side of the Joint Committee be represented by reasonably intelligent liberals who understand how much leverage their President has given them in this deal -- and have the toughness to play out that good hand.



Anonymous said...

Greatly appreciate this detailed, easy-to-follow unpacking of strategic implications in the debt ceiling deal. This is just INCREDIBLY helpful!


Anonymous said...

1)I believe you mean the 2001, 2003 Bush tax cuts (NOT 1991 and 1993).

2)There is strong argument that making the baseline current tax law (including the Bush tax cuts rising) actually makes it harder to cut taxes. See here: http://www.slate.com/blogs/weigel/2011/08/03/the_supercommittee_s_tax_trap_continued.html

M.S. Bellows, Jr. said...

Anonymous makes two good points above. The first just shows that I can't keep my Bushes straight: d'oh! Dates fixed.

The second -- that "There is strong argument that making the baseline current tax law (including the Bush tax cuts rising) actually makes it harder to cut taxes" -- is fascinating. Basically, Dave Weigel argues (in the two posts linked in an update to the post above and also at the bottom of this comment) that because the Deal mandates use of current law (tax rates go down) rather than current rates as the baseline, it may actually be harder for the JC to reach a deal on taxes. (Read Dave's posts to understand why -- but in a nutshell, he points out that a deal to raise the wealthy's taxes but extend the middle class's cuts would be scored as a revenue loss and trigger even deeper program cuts.)

The fact that the Deal mandates a current law, rather than current rate, baseline supports my thesis that Obama managed to embed "new revenues" in the Deal, and I suspect that any counterintuitive disincentive is unintentional -- but that doesn't make such disincentive any less real. In other words, Weigel's right.

But I'd argue back that this still works in Dems' favor, in terms of negotiating strategy and electoral advantage. Why? Because it either leads to a statemate (which, as I've said, works to Dems' advantage), or it gives the Dems yet another opportunity to steal campaign issues from the Rs, because if the JC's Dems accepted deeper cuts in exchange for extending the middle-class cuts then the Rs would have little excuse not to take that deal (infuriating the no-tax purists and reinforcing Obama's "we're fiscally responsible and willing to take big hits to save the nation" appeal to indie voters). Or the horse-trading could be made after the JC stalemated, with Dems publicly offering to ignore the Deal's formulas and ease the pain of automatic program cuts in exchange for an agreement on taxes.

The idea that Dems might welcome larger cuts to both domestic programs and defense in exchange for a deal on taxes sounds strange if you think this whole show is about each side trying to obtain its best deal in terms of policy. But everything the Dems are doing lately -- accepting spending cuts even though they violate Keynesian common-sense, talking like budget hawks, angering their base to appeal to independents -- makes perfect sense if you think, as I wrote back on 7/13, that this whole brouhaha isn't about policy but about the 2012 election and Dems positioning themselves to retake the House (and thus control over future budget initiatives, which would make this whole deal irrelevant). I predicted back then how things would unfold if the Dems had their eyes on the House rather than the budget, and they've all pretty much come true as predicted. (It's the Election, Stupid: http://vichydems.blogspot.com/2011/07/its-election-stupid-how-obama-is.html )

As I wrote then, Obama's willing to eat a lot of garbage in exchange for the House GOP swallowing one teeny, tiny little electoral cyanide capsule, which is what any tax increase would be.

So, sure, as Dave Weigel points out, Dems would need to eat even more garbage under the bill's baseline. But Obama's strategy all along (right or wrong) has been based on the assumption that independent voters like to see politicians eat garbage, and that liberal voters will still support Dems so long as entitlements are protected (as they have been so far) -- so if a "current law" baseline requires them to eat even more garbage but also increases the pressure on Rs to take the cyanide, I suspect the Dems will consider that a reasonable trade.

Jayant Reddy said...

Excellent commentary, thanks. I would add only that it's worth noting the "automatic" tax hikes are dependant on the President's reelection, and thus taxes become a major campaign issue. Since his position of raising taxes only on income above $250K is popular, he won't be hurt by it. But if he loses reelection, then Republicans get to have their cake and eat it, too, because a new President promptly signs another extension of the Bush tax cuts into law come January. But Obama losing reelection would mean expiration of the Bush tax cuts might be the least of the country's problems.

Cody_K said...

"...A close reading of the Budget Control Act by neutral budget analysts suggests that a majority of the 12-member Joint Committee has wiggle room if it wants some. The law doesn’t explicit define how the $1.5-trillion is to be measured. Although it says that CBO shall provide estimates measured against the current-law baseline, it doesn’t require CBO or the Committee to use that baseline as the sole way to describe the committee’s proposal..." ~ http://on.wsj.com/pfox29

Ivan F said...

Really well done piece. Thank you.

I've been making almost the exact points. I believe the subtlety of the Bush tax cuts being baked into the mandated "current law" baseline has not yet played out in the mainstream media, yet the fate of the fiscal picture depends on it.

In fact, I can see the scenario that develops, as the Dems realize what Obama holds in his hands (hint: it looks like a veto pen), where the next hostage of the legislative domain is the extension of the Bush tax cuts into 2013+. This becomes the next game of chicken. The hope for the Dems will be that they can convert the blunt instrument of the scheduled broad tax hikes into a more surgical scalpel of tax reform that eliminates ill-conceived loopholes and subsidies, and creates revenue raise on the upper end of the income scale.