The fiscal cliff has been avoided (I will no longer use this phrase), the GOP feels like it has been defeated, and Democratic congressmen feel that they won a great victory. Both parties are wrong. Passage of the latest tax hikes and spending cuts, or lack thereof, was the prelude to the upcoming debt-reduction negotiations. President Obama would do well to approach these negotiations piecemeal, instead of reaching for a "Grand Bargain" like he did in 2011.
Analysts often begin with a hypothetical event and then work backwards in order to identify the preceding events and their likelihood of happening. This process of analysis cuts through uncertainty and allows analysts to look at processes – political or militaristic – as an integrated whole, instead of a chaotic chain of events. The looming debt-reduction negotiations should be analyzed in the same manner.
So let's begin with the Simpson-Bowles Deficit Reduction Plan. It is arguably the most reliable idea of a long-term debt-reduction plan for the United States likely to pass congressional and presidential scrutiny. Even if one disagrees with the plan's particulars, the general outline of spending cuts and revenue increases has been echoed by, and is an echo of, other non-partisan debt-reduction strategies.
Far from being an isolated incident of presidential and congressional debate over $600 billion dollars worth of spending cuts and revenue raises, the latest negotiation was a small, preliminary piece of long-term debt negotiations. One of the leading causes of consistent, unsustainable deficits for the U.S government was the loss of revenues as a result of the Bush-era tax cuts and decreased economic activity during the recession. Although framed as a highly partisan debate, the package of tax increases that passed two days ago was in fact a common sense return to fiscal responsibility.
Here is where things get interesting: Two months from now, the U.S. federal government will reach its limit of debt and borrowing. At the same time, the sequestration spending cuts worth $1 trillion are planned to take effect. What most people fail to recognize is that President Obama and Senate Democrats no longer have any political capital. They may have won recently, but they will surely "lose" the next round of negotiations.
I'm not going to get into the details of our unsustainable expensive entitlement programs here, but you can read for yourself here and here. In brief, the U.S. government must save $4 trillion over the next 10 years in order to bring annual deficits down to levels lower than rate of GDP growth for the nation's economy. Furthermore, total national debt needs to be stabilized somewhere around the 65-85% of GDP range. A state (country) can have ongoing debt that turns over forever. If someone tells you different, they are either lying or ill-informed. As long as deficits do not grow continuously faster than GDP, then creditors will rarely refuse to roll over debts through the bond market.
With that in mind, President Obama and Senate Democrats must offer serious entitlement reforms soon. House Republicans, even the 85 who voted for the latest agreement, are vocally bitter about losing that round of negotiations. Time will show that these tax increases on the wealthy will only have been one part of a larger tactic of raising revenue over the next 10 years. But the GOP either doesn't recognize that, or seriously fears primary challenges in the 2014 congressional elections. So the House of Representatives will not compromise on anything less than a serious effort by the president and Senate Democrats to reign in run-away entitlement costs.
The newly elected 113th Congress has seen no change in control in either the House or Senate. Senate Democrats upped their representation from 51 to 55 seats. President Obama needs to take the lead and offer a proposal for initial spending cuts to replace the planned sequestration, and then a road-map for entitlement reform. Being a second term president, Obama must abandon the far left of his party. He needs to garner roughly 20-25 votes from Senate Democrats to support entitlement reform.
In order to do that, the president must take control and never let it go. He must not let radical Democrats frame entitlement reform as "massive cutting or slashing." Obama has to be proactive and argue that his proposal is firstly an attempt to make Medicare, Medicaid, and Social Security far more affordable and efficient. That means doing his homework and backing up his claim with detailed ideas such as, but not limited to: contract bidding, "pay for cures" instead of "pay for service," and reverse engineering of expensive equipment.
Second, and more important, the president needs to generate popular support for entitlement reform through compromise. He needs to communicate his frustration with status quo politics in Washington, D.C. and acknowledge that he understands voter frustration with Congress as well. Even if he doesn't believe it, President Obama should begin recognizing House Republicans for their willingness to work with him as part of the recent package of tax increases. Finally, the President must identify individuals in the House and Senate who are obstructionists. It is not enough to label all Republicans as obstructionists. He must make the fight personal. "Representative X from Georgia is standing in the way of a healthy economy."
In two months time, we might be negotiating a deal that bears striking resemblance to the one we just passed, or at least the tension will feel the same. In order to move forward, we need leadership from the president more than numbers and figures. Republicans, for all intents and purposes, have just put themselves out on the line, even if they were forced to. They are going to face real criticism from their constituents and legitimate challenges in 2014 primaries. The president must act decisively to reciprocate in-kind, with confidence building measures. Quite simply, entitlements should be reformed.