The Budget Vise Tightens

The failure of the “Super-Committee” will now bring some additional clashes to the forefront, immediately thrusting the issue of the extension of unemployment benefits and the extension of the payroll tax cuts forward. Republicans are indicating that they want budgetary offsets to cover the costs of any tax break extensions, a position they only seem to take on tax cuts not directed at the top rate. But I digress. Republicans, whether they realize it or not, are now looking at a greatly diminished political position on budgetary matters. The potential offsets to the 2% cut in the payroll tax, as well as the extension of unemployment benefits, would likely have been part of the deal that the super-committee failed to make. It is estimated that the extensions will cost about $150 billion per year. A failure to extend these items, which expire on December 31, will hit the economy with a body blow when we can least afford it. So the Republicans will have to make a call on those two, as well as the so called “doctor fix” for Medicare, as payments to physicians under that program are scheduled to decrease by 27% on January 1. That type of a cut will have doctors heading for the exits, threatening program access for many program beneficiaries.

The failure of the super-committee will trigger “cuts” to the defense budget over the next ten years of an additional $500 billion, on top of the previously scheduled $450 billion in cuts. These “cuts” to defense have the Republican hawks up in arms, with the McCain wing pledging to fight the sequester, and the President threatening to veto any changes to the scheduled sequester. The Defense sequester could lead to losses of up to one million jobs and about $60 billion in payroll, according to some Defense groups. I wonder if Paul Ryan would consider those jobs and the “stimulus” provided by Defense spending to be sugar high economics? But again I digress. The Republicans must now attempt to undo the sequester they agreed to as part of the debt ceiling deal, and that is going to be difficult for them. If the Democrats simply stand pat the Republicans may be forced to recognize that they have to pay for increased defense spending. If they do not choose to pay the bill, which has been the case since the Bush Administration, then maybe they can’t have the spending. Advantage to the Democrats.

Of course the big enchilada for Republicans is the extension of the Bush tax cuts. Since they are scheduled to expire Republicans will again be playing defense, since getting Democrats to agree on an extension for the top tier is going to be exceedingly difficult. The Democrats will likely drive a hard bargain that will put the Republicans in a difficult position. If the Republicans feel that a Democratic threat to just let the Bush cuts expire for everyone is credible then they will be in a box politically. The Democrats could allow expiration, and then bring forward a tax cut package for everyone but the top earners, effectively decoupling the Bush tax cuts for the top tier from everyone else, and forcing Republicans to vote against tax relief for the middle class. The Democrats have managed, in my view, to go from weakness to strength on the budget. The question becomes one of intestinal fortitude. Does the Administration have the gumption to allow expiration of the Bush tax cuts for everyone? If the Republicans think they might will they be more inclined to negotiate a balanced deal? Remember the Nixon “mad bomber” strategy? Maybe an offshoot of that is required for these negotiations.

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