Washington Report: Fall Budget Drama

by Craig Piercy

Back from summer vacation, Congress and the White House are gearing up for round three of the great debt limit fight. Round one you will remember well. President Obama and GOP congressional leaders narrowly averted a federal default in August 2011 by agreeing to couple an increase in the debt limit with $1.1 trillion in spending cuts to be proposed by the so-called “Super Committee.” Of course, the Super Committee couldn’t reach a deal, which resulted in the sequester, an across-the-board spending cut of roughly five percent for domestic programs and seven-and-a-half percent for defense spending.

Round two happened earlier this year when the GOP agreed to approve a small debt limit increase in exchange for a provision that docked congressional pay if either chamber failed to pass a budget resolution. Both the House and Senate did in fact approve their budget blueprints, but they differed wildly in their spending levels and priorities, yielding no compromise and essentially bringing this year’s appropriations process to a halt. At this writing, the new federal fiscal year is set to begin on October 1, and not a single one of the 12 annual appropriations bills needed to fund the federal government’s operations for 2014 has been enacted. Furthermore, the federal government has blown through the March debt limit increase, and since May 19 the Treasury has been using “extraordinary measures”— basically kiting checks between federal accounts—to pay its obligations. Unless another increase is agreed to by Congress and the President, the federal government will go into default sometime in mid- to late October.

Some D.C. observers argue that this is the “new normal” and to a certain extent, I think they are right. In the current political environment, the GOP House and the Democrat-controlled Senate have to play political brinkmanship with each other in order to craft a deal while mollifying the more unruly elements of their caucuses. The White House, stung by the tactical defeat it suffered in round one, is taking a hard line. White House Press Secretary Jay Carney: “Let me reiterate what our position is, and it is unequivocal. We will not negotiate with Republicans in Congress over Congress’s responsibility to pay the bills that Congress has racked up, period.” Conversely, many GOP members of Congress are dissatisfied with the outcome of round two, which yielded no additional budget cuts. House Speaker John Boehner said in July, “We’re not going to raise the debt ceiling without real cuts in spending. It’s as simple as that.”

Failure is not an option. Neither President Obama nor GOP congressional leaders can be seen as compromising the full faith and credit of the U.S. government. So let’s forget about what each side is saying, and focus on what each side needs. President Obama needs sequester relief. Yes, the sky didn’t fall with the first sequester, but most of the fat has been trimmed from departmental budgets and next year’s cuts would be bloody. As CEO of government, Obama cannot afford for his organization to be severely compromised, especially as the challenges he faces, i.e. Syria, become more acute. The sequester is impacting his ability to govern and is a threat to his legacy. The Congressional Republicans, on the other hand, need to deliver spending cuts—not contrived super committees, but real savings in the mandatory social welfare spending accounts that are driving long term deficit projections. The Republicans have an image problem as purveyors of gridlock. Without a record of achievement, the GOP’s chances of retaking the Senate in 2014 may be diminished.

One possible deal could involve “chained CPI,” an alternative method of calculating inflation and cost-of-living adjustments that Obama himself proposed in his latest budget request to Congress. Under current federal cost-of-living calculations, if the cost of a commodity, say beef, rises, then the COLA is adjusted by the proportionate amount. Chained CPI incorporates a substitution effect, so that if beef prices rise, families buy more chicken, thereby lessening the impact. Chained CPI, if applied across-theboard to the tax code and all federal programs, would save the federal government roughly $120 billion a year. Take half of that savings and apply it to targeted sequester relief, especially in areas like defense, infrastructure and R&D, and you have a deal that both sides could learn to love.

While ultimately the deal may look different than the one I’ve described above, both sides will need to step back from their red lines to solve the debt limit problem.

by Craig Piercy