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What Obama Can Give Away, And What He Can't

Several news stories broke last night suggesting that President Obama wants to broaden the debt ceiling deal with Congress, reducing deficits by $4 trillion over a decade, rather than the $2 trillion previously believed. Here's Politico, here's the New York Times, and here's the Washington Post. The reports all suggest Obama will agree to cut Social Security and Medicare in return for higher revenue.

When assessing any possible deal, it's important to recognize the parameters of the possible. "Perfect" was never going to happen, even given filibuster-proof Democratic majorities. "Good" left the station last November, and now that Obama has blundered into a debt ceiling hostage negotiation, we're looking to cling to the bottom rung of "acceptable."

What are the conditions of acceptability? My premise is that, while wasteful spending exists, it would be desirable to make up the entire medium-term fiscal gap with higher revenue, which would still leave the United States a low-tax country by international standards. However, the prospects for obtaining the votes for such a policy border on zero. The goal ought to be making it through the debt ceiling hostage crisis with minimal damage to the possibility of functioning government. 

Unlike many other liberals, I don't rule out cuts to Medicare and Social Security. I care more about avoiding draconian cuts to programs for the poor and to the domestic discretionary budget, the massive squeeze upon which is already resulting in the negligence of core government functions.

Obviously, higher revenue and shared sacrifice are vital criteria. But even more important than securing higher revenue in this agreement is preserving the chance for Obama, should he win, to end the Bush tax cuts. As I've argued repeatedly, the easiest way for Obama to achieve his policy aims is to fight the Republicans to a standoff over the tax cuts. Republicans won't accept any tax cuts that only apply to income under $250,000. If Obama wins reelection and refuses to extend tax cuts on income over that level, then the whole thing will disappear. This is the only politically plausible scenario by which the government will have adequate revenue over the next decade. That leverage is vital. It's therefore a little disconcerting to read in the Times that the Bush tax cuts may be part of the deal:

Officials said Mr. Boehner suggested that he was open to the possibility of $1 trillion or more in new revenue that would be generated by addressing tax issues already raised in the talks, like killing breaks for the oil and gas industry, eliminating ethanol subsidies and ending preferential treatment for corporate jets.
But those changes would fall far short of the revenue goal, and the source of the rest of the money would, under what they described as Mr. Boehner’s proposal, be decided by Congress through a review of tax law changes. One official said some revenue could be generated by allowing Bush-era tax cuts for affluent Americans to expire at the end of 2012, which would produce hundreds of billions of dollars, though those savings would be offset by the costs of retaining lower rates for those below the income threshold.

I'm not freaking out, because this is a hazy description of a possible element of fluid negotiations. But I can't emphasize strongly enough that Obama cannot agree to anything that locks in any part of the Bush tax cuts. To do so is to abandon the only leverage he could obtain and guarantee either the starvation of government or continuing massive deficits. If Obama wins election, he needs the ability to use the GOP's opposition to any middle class tax cut extension without an extension for the rich as leverage to let Republicans kill the whole thing for him. And if he loses reelection, then the Republican who beats him will just reinstate the tax cuts. Either way, negotiating a partial end to the Bush tax cuts harms Obama. It's the red line.

Despite Obama's debt ceiling blundering, even a budget deal heavily tilted toward spending cuts could be justified if it is the first step of a larger plan. The plan would be to first cut a deficit deal that eliminates the Republican threat to torpedo the economy and establishes his centrist bona fides, which would help him win reelection, after which he'd have full leverage to face down the Republicans on the tax cuts. I don't know if that's the plan, and I won't know until 2013. But the overriding imperative is to maintain flexibility on the tax cuts.