Sign up to stay up to date on the latest Economy headlines via email.
In the months ahead, we're going to be treated to an endless parade of process stories about the Gang of 12 “super congress” that emerged from the debt ceiling deal. Each time a staffer leaks some bit of trivia about the internal machinations of this opaque committee, the Beltway media will write a flurry of stories about it, lawmakers will signal whether they might support this provision or that one and the pundits will sift through the tea leaves trying to predict whether this time the kind of “grand bargain” the Washington Post editorial board lusts after will finally come to pass.
It will all be a piece of Kabuki theater. The way this deal ends is fairly easy to predict – it's a set-up that will result in fairly deep cuts to domestic spending, won't raise taxes on the wealthy and will leave “defense” spending largely untouched – a process that will force cuts to important public services.
In the real world, here's the end result of that ludicrous battle over the debt ceiling: Tens of thousands of vulnerable people will lose health coverage, funding for Head Start will be cut, thousands of low-income students will be denied an education, and many more public sector workers will be added to the unemployment rolls. Neither the environment nor our decrepit 19th-century infrastructure will get their needed funds.
Many of the budget changes on the way will be highly unpopular, but no member of Congress will have to cast a vote on them. The social safety net won't be protected, but lawmakers will be – none will face their constituents' ire.
It's a Set-Up
Here's how the deal was supposed to play out, according to the White House: Congress cut around $1 trillion in spending over the next 10 years as a “down payment” on a larger package in exchange for raising the debt limit through the 2012 election. The Gang of 12 is then supposed to come up with at least another $1.2 trillion in debt reduction through a mix of additional cuts – possibly to include cuts to Medicare and Social Security – and revenue increases. If seven members vote on a package along those lines, it will get an automatic up-or-down vote in both chambers of Congress – amendments won't be allowed.
If they can't cut a deal – or can't cut a deal that passes a deeply polarized Congress -- an automatic “trigger” kicks in, forcing an additional $1.2 trillion in cuts. Democrats had wanted it to include a mix of cuts and revenue increases in an effort to make Republicans negotiate in good faith, but that proved a sticking point with the GOP caucus. Eventually, the parties settled on a 50/50 mix of security and non-defense cuts – the the defense cuts were supposedly something Republicans would find intolerable.
The Democrats would have yet more leverage, they said, because the trigger would kick in at the same time as the Bush tax cuts are set to expire, which in theory would allow Obama to raise taxes on the wealthiest Americans if the Gang of 12 comes up with a deal that isn't “balanced.”
It's an interesting legislative story, but none of it is going to happen.
Designed to Fail
The “super congress” that emerged from the deal offered a way to kick what had been an unbridgeable divide down the road a ways, but it doesn't alter the contours of the debate. While some Republicans have indicated that they might support closing a few loopholes to raise revenues, the party as a whole remains committed to their no-tax pledge. Democrats – especially House Democrats – have repeated that we need a “balanced” approach to cutting debt like a mantra. They've signaled they would be willing to accept some cuts to Social Security and Medicare, but not cuts sufficiently deep to entice enough GOP support for a package with new revenues.
Political scientist Seth Maskett analyzed the voting records of the Gang of 12 and concluded that it represents a “a pretty good balance between the parties,” featuring “roughly equal proportions of extremists and moderates” that “should agree on approximately nothing.” The most likely scenario is that this group won't come up with a deal that gets the seven votes needed to send it to the full Congress for a vote. If they do, it will by necessity be at least a somewhat “balanced” approach, and the GOP, terrified of its Tea Party base, has made it clear that such a deal is a non-starter – it'd be DOA on the Hill.
The “leverage” that's supposed to move these legislators closer together is one of those Beltway fantasies that bears no resemblance to any objective reality. Conservatives have little incentive to deal, in part because Democrats have already negotiated away substantial cuts in military spending in the “trigger.”
They did that first with a little sleight-of-hand. The savings are based on a 10-year baseline of defense spending, but future Congresses will decide the specifics of what gets cut. The 50/50 mix of defense and non-defense spending is only locked in for the first two years. After that, the cuts to projected spending could theoretically all come from the non-defense side. Second, “defense spending” doesn't only include the Pentagon's budget, but also dollars for agencies like the FBI, the Labor Department, Commerce and Homeland Security.
Defense Secretary Leon Panetta has already said that further cuts to the Pentagon budget “would result in a further round of very dangerous cuts across the board, defense cuts that I believe would do real damage to our security." A few days later, Obama himself agreed with that analysis, saying that more debt reduction had to come from “tax reform” and “modest adjustments to health care programs like Medicare.”
What this all means is, as defense analyst Winslow Wheeler noted, “the most likely alterations to DOD spending appear today to be significantly less than the much touted” numbers we're hearing about in the press. And that's a reduction from a very bloated defense budget that's increased by 43 percent since 9/11/01.
Bush Tax Cuts Will Remain
President Obama's promise to veto an extension of the Bush tax cuts on high earners if Congress doesn't pass a “balanced” debt package is similarly hollow. The bottom line remains that Republicans are willing to shut down the government if they can't have their way, and the Democrats are not (or the GOP is bluffing and the Dems won't call them on it, which has the same effect). And while most Democrats would like to raise taxes on the highest earners, they don't have any interest in raising rates on the middle class.
That creates a mismatch in leverage. We know how it is likely to turn out because we played this game just last year, when Republicans insisted on spending cuts and the extension of the Bush tax rates in exchange for a budget that included an extension of unemployment benefits and aid to cash-strapped states. That was the beginning of this era of legislation-by-hostage-taking, and it's unclear what would be different at the end of next year, unless we end up with a very different Congress.
Fortunately, there is only moderate pressure on Democrats as well. And here, the administration deserves credit: they insisted in exempting Social Security, Medicaid, a variety of anti-poverty programs and Medicare benefits from the trigger (it would force some cuts to Medicare providers, but not to Grandma and Grandpa's benefits).
So it's a safe bet that the Gang of 12 goes the same way the Gang of 6, Simpson-Bowles, Rivlin-Domenici or any number of previous groups of Very Serious People trying to institute politically unpopular cuts went – nowhere, and fast.
So the trigger will kick in. What does that mean, exactly? In short: deep cuts to important services.
The government is projected to spend $46 trillion over the next decade, but a large chunk of that – more than $27 trillion -- is “mandatory spending” on Medicare, Social Security, Medicaid and interest payments, all of which are exempted from the trigger. Defense is another chunk, and then there's $6.7 trillion in domestic “discretionary spending.” In the first round, there was around $600 billion in cuts to this category, and when the trigger kicks in, it will add up to a total of $1.2 trillion, or a reduction of around 18 percent.
Matt Cameron at the Center for American Progress crunched the numbers and figured out how those cuts would be divided. The biggest hit would be in “education, employment, and training” – more than a fifth of the cuts would come from that category. Discretionary health-care programs, transportation, environmental protection, the State Department and Justice would also be hit. We're talking about a lot of programs that are both popular and necessary – Head Start, child care and K-12 education, family planning and health-care for the poor, job training, Pell grants, and services for the elderly.
The cuts will hit state budgets hard. According to the Center for Budget and Policy Priorities, “fully one-third of this category of federal spending flows through state governments in the form of funding for education, health care, human services, law enforcement, infrastructure, and other services that states and localities administer.” The “large cuts in federal funding to states would force states to make still-deeper cuts in their budgets,” concluded the analysis.
So states and localities, which have already shed almost 600,000 public sector jobs since 2008, will continue to do so, adding to the unemployment rolls and the demand for vital public services just as the funding for those services is being cut. Many of the cuts are “backloaded” in the belief that the economy will be rolling on all cylinders in 2013, but most economists expect this “recovery” to remain anemic in the near-term, if we haven't technically dipped into a recession once again by 2013.
A Process Based on a Big Lie
All of this is being driven by an alternative universe – inhabited not only by conservatives, but also most of the legacy media – in which we face “runaway” government spending and, as House Majority Leader Eric Cantor, R-Virginia, put it, “Washington doesn't have a revenue problem.”
That's the opposite of any objective reality. The undeniable fact is that this year, for the third year in a row, the federal government will collect the smallest share of our economic output in taxes than it has at any time since 1950, before we even had programs like Medicare and Head Start. And while spending (as a share of the economy) spiked short-term as a result of the crash, and efforts to counter the recession, before this debt reduction deal was cut, the government was projected to spend 23.6 percent of our economic output next year and 22.5 percent in 2014. Is that “runaway spending”? Well, the government spent 23.5 percent of our output under Ronald Reagan in 1983; four of Reagan's eight budgets authorized spending at 22.5 percent of our output or more. So this entire exercise is predicated on economic falsehoods.
And these outcomes are all but baked into the cake already. You can forget about all the stories of Congressional sausage-making to come – the debt ceiling deal is designed to force lawmakers to make unpopular cuts to popular programs, and keep taxes near their historic lows.