Okay, don’t laugh, but with the two parties finally sitting down to negotiate, a bipartisan budget deal in Washington suddenly looks kind of plausible. The long deficit scold dream of a huge Grand Bargain with trillions of dollars in savings is off the table. Instead, both parties are negotiating a smaller deal to replace sequestration, which neither side likes, with some mix of longer term cuts that take the fiscal shackles off the recovery. Today has brought a sudden burst of momentum.
Democrats have always proposed replacing sequestration with a mix of higher revenue, by reducing tax deductions for the rich, along with cuts to mandatory spending. Republicans have offered to replace sequestration with cuts to mandatory spending, but have insisted on no revenue at all.
The Obama administration wants to bridge the gap by fudging the definition of revenue a little — perhaps through “user fees” or some other mechanism. Treasury Secretary Jack Lew, speaking at the Center for American Progress, framed the goal in Republican terms: “As we do that, we need to replace the harmful across-the-board cuts known as sequestration with commonsense measures that rein in spending.” Lew didn’t say he didn’t need higher revenue, but he didn’t say he didn’t, either.
Meanwhile, Gene Sperling also made the case for a budget deal, in elliptical terms that sounded like a softening of the revenue demand, without any explicit statements to that effect. Josh Green, listening closely, followed up:
I hustled after him to ask if was really proposing an entitlement-cuts-for-stimulus budget deal. Sperling smiled a little awkwardly and said something about how he’d love to negotiate with me. … But he didn’t rule a deal that cut entitlements without additional tax revenue, even when I asked him a second time.
This may sound as if the administration is preparing to give in to Republicans. Except that, oddly and perhaps not coincidentally, Republican Tom Cole — an influential pragmatist and ally of John Boehner — signaled his willingness to accept revenue at the same time Obama’s advisers appear to be backing away from it. In an interview with Al Hunt, Cole suggested he could accept actual revenue, not just the imaginary “dynamic” revenue through hypothetical economic growth that Republicans sometimes float:
The congressman said a deal "could" include curbing tax loopholes, although it "depends on what they are." He expressed openness to revenue-raising tax reforms on repatriation of stranded profits overseas and ratcheting back the carried interest loophole, which allows private equity firms to avoid paying some taxes by having their income taxed as capital gains. "I think that's certainly -- this is my personal view, it's not speaking for anybody else -- that ought to be something on the table," he said. "So those kinds of things are reasonable."
He said the GOP is "much more into what I'd call pro-growth revenue" like expanded offshore drilling and "one-time things like timber sales." He acknowledged that "there are some" Republicans who oppose any new tax revenue, no matter what. "But, you know, the reality is, you're going to have to have a deal here. And a deal means everybody gives something up."
It’s probably not a coincidence that both sides are floating compromises at the same time. Indeed, it’s odd that they appear to have even crossed into each other’s territory, with the Republican warming up to the revenue at the same time the Democrats downplay it.
If you want to judge whether any agreement makes sense, the best guide is not whether Democrats win revenue, but whether they win permanent changes in policy. The domestic appropriations budget gets written year by year. Trading away permanent changes to Social Security or Medicare in return for temporary increases in the discretionary budget is a bad deal — it would boost the recovery, but at the cost of handing conservatives a one-sided victory over the scope of government. If Obama gives Republicans permanent changes in return for temporary concessions, it will be clear Republicans out-negotiated him on sequestration. If Obama can get other permanent policy victories — different (and more regressive) forms of taxation, or funding for early childhood education — that is the sort of victory that could be traded for long-term entitlement cuts.
In any case, we’re a long, long way from a completed deal. Public signals of compromise from both sides is step 1; a conservative freak-out is steps 2 through 99. Still, the budget negotiations have quickly reached a place that was hard to envision even a week ago.