As Debt Talks Begin: Dems Hold Upper Hand

Republicans in Congress set to resume debt ceiling talks Thursday should go into them with a clear sense that they have a weak negotiating position. Democrats have the presidency and control of the Senate. Refusing the raise the debt ceiling altogether isn’t an option since default would surely cause a double dip recession that the White House could and would blame on the GOP. Simply approving the debt ceiling pro-forma or asking for some future spending caps in return would probably be the best way to move forward and tackle the serious questions of entitlement, defense, and tax reform. Since both “go-easy” paths seem unpopular in the Republican caucus, there’s another potential solution: a grand compromise that’s consistent with both parties’ stated ideologies.  In particular, if they want to get real debt reduction talks moving, Democrats should agree to broad means testing for entitlement programs while Republicans give up on defending tax expenditures.

The Democratic Party’s ideology—which sees government intervention as a major way of helping those somehow given the short end of the stick—should be amenable to cutting entitlement benefits for the wealthiest Americans. Except for crude theories that cutting benefits for the rich will somehow result in everyone turning against them for the poor (experience doesn’t support that happening), there’s no reason that well-off people should get handouts.  In fact, a smart restructuring, somewhat more generous than the one Paul Ryan proposes but following many of its outlines, could actually improve things for the poorer Americans Democrats claim to champion. If Social Security benefits are cut for the truly well off and total spending on them cut, for example, it would be pretty easy to establish a minimum benefit in Social Security to help those who work a lifetime for low wages. Similar reforms in Medicare could actually cut (or even eliminate) premiums for the poor. Democrats, many of whom are in thrall to labor unions, government workers and left-wing lawyers won’t be able to do agree to means testing easily so, to get a sufficient number of them on their side, Republicans will have to offer something in return.

In particular, they should endorse Tom Coburn’s position that narrow tax expenditures deserve the same skepticism as spending programs.  Doing so, after all, is clearly consistent with a limited government, “hands off” economic policy the GOP favors. Although limitations of some broad tax expenditures (mortgage interest and health care) have the same consequences as a marginal rate hike, the great majority of tax expenditures serve to advance narrow politically determined goals. While some tax expenditures, such as the earned income tax credit, are still good public policy, a tax reform that targets them could probably return federal revenue to its historical 18-19 percent-of-GDP levels without any real increases in marginal tax rates.

In short, if Republicans won’t agree to a simple debt ceiling debate, they should recognize the weakness of their current position and propose a meaningful compromise that both sides should accept.

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