Grand Bargain or Royal Scam

Two years ago, after a historic mid-term election loss, President Obama agreed to extend all the Bush tax cuts.  Suffice to say, that move was met with some degree of skepticism.  Actually, that's a polite way of putting it.  House Democrats were livid, believing they had been sold out by the President. In fact there were quite a few pundits who felt Obama needlessly blinked.  I was not one of them.  

To recap, the GOP was threatening to shut down the government unless Obama agreed to their demands.  Faced with the real possibility of a shut down, Obama decided to get the best deal he could. Yes, he extended the cuts, but he managed to get a host of badly needed legislation passed, including START and a payroll tax cut.

Now, two years later, an eery sense of deja vu is sweeping through Washington.  The Bush tax cuts are, once more, on the verge of sun setting.  And the President, fresh off a rather convincing thumping of Mitt Romney, faces a tough decision on what to do with them.  Obama wants a permanent extension of the middle-class cuts only; Republicans want all of them extended, if not permanently, than at least through 2013.

As if that wasn't a full enough plate, there are the automatic sequesters, set to kick in at the end of the year, that must be dealt with.  If no agreement is reached, huge cuts to vital social programs and the Pentagon will go into effect immediately.  Most economists agree that the combination of such drastic cuts in spending and tax increases will likely plunge the economy back into a recession.

The President, mindful of those facts and equally aware that he was this close to a grand bargain with Speaker John Boehner in the summer of 2011, will undoubtedly feel the pressure to once more cave. After all, who wants to go down as the President who permitted his country to slide back into a recession? Just ask Mr. Double Dip himself, David Cameron, how things are going in merry old England.

But, though the pressure will be great, Obama must resist, and here's why.  Republicans have no choice but to acquiesce this time around and they know it.  Why?  Because this isn't 2010, it's 2012.  John Boehner may talk bravely, but the polls are NOT on his side.  Without exception, the majority of Americans favor the rich paying a bit more in taxes as part of a deficit reduction plan.  Grover Norquist may scream all he wants, but in the end, he won't get his way on this one.  That's because Obama is holding all the cards.  There is no pending government shut down.  If Obama doesn't get the deal HE wants, ALL of the Bush tax cuts sunset.  That's right, ALL of them, and there isn't anything on God's green earth that can prevent it.

That's called leverage and, even in the alternate universe of the Tea Party where reality often takes a permanent vacation, that's a pretty effective weapon. That weapon certainly came in handy during the debt-ceiling negotiations.  But the GOP's antics almost led to a default last summer.  No one wants a repeat of that nightmarish episode.

That's why Obama must use his leverage wisely. While he must remain resolute and clearly draw a line in the sand, he also has to provide a path for Boehner and House Republicans to accept a deal that they will be able to sell to their constituents, who will, no doubt, feel betrayed.  Just think 2010, only in reverse.

There are a host of enticements that Obama can offer as sweeteners.  Entitlement reform, for starters.  While social security is still on firm ground, Medicare and Medicaid need some fixing if they are to survive.  Also, there's the issue of spending cuts.  While cutting too much, too quickly will kill the recovery, a plan for true deficit reduction can be set in place with real triggers that lead to responsible cuts spread out over a ten-year span. Then there's tax reform.  The closing of loopholes and certain deductions will net significant revenue to the treasury. But Obama must make sure that middle-class deductions like mortgage interest are protected.

But the biggest and tastiest sweetener that Obama can offer Boehner will be a drastic reduction in the corporate tax rate.  Obama can dangle an effective rate as low as, say, 15 percent, as an incentive for the upper tier Bush tax cuts going bye, bye.  That should be his last resort, his trump card, if you will.  Properly packaged, Boehner can come out looking like a hero to his caucus, while Obama gets to go down as the President who negotiated the agreement to save entitlements and put America back on the path of fiscal responsibility.

One more thing. Under no circumstances should Obama agree to a temporary extension of the Bush tax cuts or a deferment of the sequesters while both sides continue negotiations on a deal.  Why?  Because in March the debt ceiling will, once more, have to be raised.  If you thought Republicans were intransigent in 2011, just wait until next year.  The President cannot allow himself to be boxed in like that again.  He must make it crystal clear to both sides that a deal must be made by the end of the year. Period.  And that deal must include addressing the looming debt ceiling.  The country simply can't afford these types of displays anymore.

Like I said a few months ago, leverage only counts if you use it.