The Price of Politics (17 page)

“We want a debt cap with enforcement that’s tied to spending and taxes.” The debt cap would set a limit on government borrowing. Exceeding it would trigger an enforcement mechanism that would automatically cut spending and raise taxes in amounts equally painful to both Republicans and Democrats.

“There’s mutual agreement that we need discretionary caps,” he said. He was referring to a ceiling on spending by domestic departments and agencies, such as Education, Defense, Transportation and the Environmental Protection Agency, which then accounted for about 39 percent of the federal budget. “We’ll support that.”

Biden then took another popular idea off the table: generating savings through tax code reform.

“We agree the tax code is broken,” he said. “And we want to produce fundamental reform next year, but it’s really an issue for Ways and Means and Finance,” he said, meaning the committees in the House and Senate that handle taxes.

Geithner took the floor to describe what lay in store if they failed to act.

“Our number-one objective is to avoid a catastrophic loss of confidence. The debt is a more serious problem today than it was in the ’60s or the ’90s. If we don’t do something now, we’re jeopardizing the future.”

If international creditors began to doubt the safety of U.S. debt obligations, the country was in danger of losing its ability to continue borrowing. If that happened, the Treasury would be unable to fund the national debt.

They were facing “a test of our credibility,” he said, and issued a challenge: “Weaker countries are doing tougher things, and we need to do tough things.”

Geithner repeated his conclusion that annual deficits needed to be reduced to 3 percent of the Gross Domestic Product, a level that a wide range of economists had concluded was sustainable. It would demonstrate that the United States was at least moderately disciplined.

It was a wildly ambitious goal. The current annual deficit was running close to $1.3 trillion, or 10 percent of GDP.

Geithner laid out the administration’s ultimate goal. “We want to get to primary surplus in 2015”—meaning a surplus excluding interest payments on existing debt. “And the good news is, everyone does.”

The Simpson-Bowles commission and the House Republicans had similar goals.

The treasury secretary reiterated Biden’s call for a strict enforcement mechanism. “We have to have a real trigger” backed by the force of law, which would force deficit reduction if we don’t reach agreement, he said.

It was not possible to postpone action until the next election cycle. “Reforms have to be broad-based to be credible.” The chief audience was the bond market, the global web of bond traders whose collective decisions about the stability of the country’s fiscal situation dictated the interest rates the Treasury paid on new debt.

“We can’t do it without more revenue,” Geithner continued. “If you try, the world will laugh at us.”

The Republicans present resented his challenge.

Geithner had earlier publicly mocked the Republican refusal to extend the debt ceiling, calling it “political theater,” and effectively deriding them as showboaters and bluffers.

“We have to do something to reduce long-term health care costs,” Geithner continued. “There’s a way to start without resolving all this, but we can’t rely solely on targets and triggers” to force cuts.

Jack Lew, the budget director, took over. He wanted to make sure everyone understood that this crisis was of a different magnitude than debt crises in the past. “Now I’m always meeting with the bond markets,” he said. “That wasn’t true in the ’90s. They want to know, ‘Are we serious?’ ”

They had to act decisively. There would be no partial credit from the bond market for “a Band-Aid” solution. It had to be comprehensive. Lew walked through the proposal the president had made at George Washington University three weeks earlier. This was the plan Biden had opened with: $4 trillion in deficit reduction over 12 years,
rather than the usual 10 years. It included spending cuts, Medicare and Medicaid reforms, changes to the tax code, and limits on itemized deductions for the wealthiest taxpayers.

On the national security side, including Defense, the State Department, Homeland Security and Veterans Affairs, Lew said, “We are beginning a strategic review—a fast strategic review is being initiated. But it’s possible to talk about the numbers without Defense being on the table.”

“Veterans Affairs,” Biden interrupted in some wonderment. The military was sacred, and it could be political suicide for Democrats to consider cuts for vets. “This is a dangerous area,” he acknowledged, “but we should look at it.”

“Medicare,” Lew continued. “We should cover the Doc Fix.” They should continue to stave off the dramatic cuts in Medicare reimbursements to doctors as Congress had been regularly doing.

“Again, we’re going to treat Medicare and Medicaid separately,” Lew said. The administration thought it would be possible to save $5 billion on reimbursement rates for doctor-prescribed durable medical equipment—in-home medical items such as wheelchairs, hospital beds or diabetes-testing equipment.

There were lots of potential savings in other mandatory entitlements, though Lew pointed out that the House had voted for significantly more in the Ryan budget—$700 to $900 billion in such cuts. The distance between the $5 billion for medical equipment and the $700 to $900 billion from the House was a long one—a Grand Canyon–sized gap.

But this meeting was about reaching agreement between the Democrats and Republicans in the room. “There’s a lot of overlap between where you are and where we are, but this isn’t going to be easy,” Lew said. He cited agriculture subsidies and various education programs that both sides agreed could be cut.

Lew said he was concerned about low-income taxpayers and the impact cuts would have on the poor. Then he turned to tax reform, despite the fact that Biden had pretty much taken it off the table only a few minutes before. “We should have a tax expenditures discussion,”
he said, referring to deductions, such as mortgage interest, charitable contributions and health insurance costs. He suggested the next step should be laying out the White House and Republican plans side by side.

Biden then called on Sperling to talk about a proposed debt cap. This would set a specific dollar amount for the national debt which, if exceeded, would trigger automatic spending cuts and revenue increases. It was the alternative to default. Including both spending cuts and tax increases, he said, was intended to make the consequences of exceeding the cap unacceptable to both sides.

“The goal is for it not to take place,” Sperling said. “The goal is for it to be equally offensive [to Democrats and Republicans] so that we are forced to act. Getting the debt under control is the ultimate target. It’s not just me who says this.” Jim Nussle, a former OMB director, and Doug Holtz-Eakin, a former CBO director, both Republicans, agree, he said.

Geithner offered a positive spin on the situation, saying the “projected deficit paths” that the administration and House Republicans were on “are not that far apart, though revenue is the big issue.”

Eric Cantor was next.

“Our budget assumes a debt limit increase as well. So we’re both kind of dealing with that. But we have a lot of savings. The Affordable Care Act—” He kind of stuttered as he made a deliberate point of not calling the 2010 health care reform legislation by its often disparaging name, “Obamacare.”

“You’re not going to go there,” Cantor said. “So we’re not going down the revenue path.”

It was a categorical statement. If Democrats wanted tax increases, the only acceptable trade-off would be changes to Obamacare. He was taking both off the table.

“We disagree on how to get revenue,” Cantor said. The Republicans wanted revenue by growing the economy, the Democrats by raising taxes.

“We deal with the safety net issues very differently. We block-grant Medicaid.” Lump sums would be given to the states for medical care
for the poor. This left the states responsible for covering additional costs, but also allowed them to set eligibility requirements. Medicaid would cease to be an open-ended entitlement that guaranteed care to all who qualify, regardless of cost. The Republicans, he said, also had a “vastly different” approach to Medicare in Ryan’s premium support proposal.

“Ultimately,” Cantor said, “this is going to be for the next election to decide, but we shouldn’t take everything off the table. There may be areas in Medicare and Medicaid where we can come to agreement.”

“Areas of commonality” definitely existed in the approach to cuts in military retirement programs and agricultural subsidies, he offered.

Responding to Sperling’s debt cap suggestion, Cantor stated bluntly, “Our problem is we view your proposal as a tax trap.” If the Republicans went along, the Democrats would have a strong incentive to hold out because, at the end of the stalemate, there would be not only spending cuts, but an automatic tax increase.

“That said, there’s plenty of commonality on the spending side. The Government Accountability Office says the deficit won’t go away unless we deal with the entitlement programs. Let’s start where we can agree. We need real enforcement.”

Cantor said he concurred with Geithner that the need for action was urgent. “I agree we need to get policies done and enacted by year end. We can’t rely on out-year triggers.”

“There’s no deal without a debt cap,” Geithner retorted. “No deal without specific savings. If we don’t solve the revenue, Medicare, Medicaid problems, then we have to agree to debt targets . . . automatic enforcement.”

Senator Kyl wanted them to explore other ways to curtail spending, such as legislation introduced by Senators Claire McCaskill, a Democrat, and Bob Corker, a Republican, that would mandate across-the-board cuts to federal spending, or a balanced budget amendment to the Constitution. “I’m deadly serious on Constitutional spending limits,” he said.

“Without revenues, it will not pass,” Biden said. “There’s no constituency for that to pass in the Senate.” Even if it did, Obama held the hammer: “And it will face a veto pen.

“Let’s plan on the next three or four meetings. What can we do that might pass the smell test? Each of us needs to bite the bullet. Keep moving through each meeting and see what we can do.”

Geithner aimed at the heart of the Republican argument that growing the economy would increase revenue. “One of the things we should do is take off the table growth assumptions that help us wish away the problems.” Growing the economy would increase tax revenue, but nobody knew by how much. He was saying what they all knew. The Congressional Budget Office refused to use assumptions about future growth. Even Congress’s Joint Committee on Taxation, while slightly more willing to consider the future impact of tax proposals, wouldn’t base future revenue estimates on growth assumptions.

Senator Daniel Inouye, the Democrat from Hawaii who chaired the powerful Appropriations Committee, had a single remark. The 86-year-old World War II veteran, who had lost his right arm in combat, warned about cuts to the Department of Defense. “We’re not assuming another 9/11,” he said. “We can’t assume that it won’t occur again.”

“You’re right, Mr. Chairman,” Geithner said.

Inouye, who was in his ninth six-year Senate term, lamented the George W. Bush years. “We responded to two wars with tax cuts and more spending. We can’t do that.”

Baucus interjected, “There’s waste in DOD.”

“Yes,” Biden agreed. “Military health care is a huge contributor.”

“We should do something there,” Lew agreed. But if military cuts were going to be recommended, he said, “We’ve got to do it together” in a bipartisan effort.

Representative James Clyburn, the third-ranking Democrat in the House, said, “I agree we need to take a look at Defense.” Clyburn, whose district in South Carolina is heavily dependent on military spending, added that cuts to the military would be “very tough for me.”

Biden instructed the staffs to come up with an agenda for the next meeting. “We’ll try to pull together one summary of what we all did.”

After a few pleasantries, the meeting ended.

Cantor was surprised. When he had been put on the Biden group, Boehner had warned him it wouldn’t be a serious effort and that he wanted him to just sit through each day, grin and bear it. Though the first meeting had revealed big differences, he thought the vice president was attempting to mediate. He told his top staff, “Maybe it’s not just going to be a charade.”

B
iden convened the next meeting on Tuesday, May 10. The goal that day was to identify $150 billion in proposed cuts over 10 years, and by the end of the meeting they had agreed on $123 billion in cuts, including $9 billion from federal employee retirement programs.

“We could improve upon this,” said Jack Lew, “if we looked at national defense.”

He got no immediate takers. With its annual budget near $700 billion, counting extra appropriations for the war in Afghanistan, that was where the money and savings could be found. But it would have to wait for another meeting.

“We’ve got to go to the big numbers if we’re going to get this done,” Cantor said.