The Fiscal Door Opens Slightly

Well the sequester has hit and no major disaster has occurred. As those of you that read the blog know I have been very critical of Republicans for their no compromise position on fiscal issues. They continue to warrant that criticism, but there are some signs that the Republican glacier like opposition to any new revenues may be beginning to thaw.

Since I have been so hard on Republicans let me take a moment to issue a little criticism to the Democrats. It has been very clear to me that the Republicans were not willing to negotiate any changes to the sequester. On January 8th I posted my prediction that the sequestration, as written, and including defense, would take effect. The idea that Republicans could be moved on that issue was ridiculous on its face. Does that Republican intransigence mean that Democrats should give way? No, I do not believe so. But certainly it appeared to me that the Administration was unprepared for the sequestration end game. The President seemed genuinely surprised that an outside campaign did not work to change Republican votes. If he was surprised by that I can tell you he is in for a rough year. The Administration messaging on sequestration was also, frankly, a mess, with the President himself contradicting earlier Administration predictions of doom by saying that sequestration would not “be an apocalypse.”

The truth of the matter is that a sequestration fix would have been a terrible vehicle to use to close tax loopholes, which is what the President sought. I felt the same way when Speaker Boehner tried to introduce the “closing of loopholes” as a way to raise revenues during the debt ceiling crisis so he could avoid marginal rate hikes for top earners. The closing of loopholes and tax reform should be used as part of a “grand bargain” that may still be possible, despite all the childish behavior that has occurred in Washington. You could raise another $600 to $900 billion in revenues while striking a deal on entitlement reform that could bring Republicans to the deal. Think I am crazy? Listen to Republican Senator Kelly Ayotte of New Hampshire, who broached the possibility on “This Week” in the below attached clip.

If the Republicans took the position that revenues are on the table, but drive a hard bargain (for example the Ayotte demand that new revenue be used exclusively for deficit reduction)they could eliminate much of the upfront criticism. There are going to be serious disagreements even after the Republicans put revenues on the table, but the idea is that real negotiations can begin on solutions that can only happen in a bipartisan way. The Ayotte position is likely the result of the defense cuts contained in the sequester, as her, Lindsay Graham, and John McCain remain strongly opposed to defense reductions. Without a grand bargain the three amigos better get used to even further reductions in defense spending. Maybe the sequester will provide the impetus for real negotiations.

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