The Democrats Cave

Harry Reid's latest proposal meets the Republicans' demands -- and they'll still ask for more

Harry Reid - Jim Young : Reuters - banner.jpg

From the outset of the debt-ceiling fight, House Republicans have made two clear demands: any agreement to raise the debt limit must include offsetting cuts of at least $2.4 trillion and could not include any revenue increases. For a time, it appeared that some grand bargain to reform the tax code and entitlement programs might obviate these demands. But those talks fell apart. Democrats first pushed for a deal that would include roughly 3 to 1 spending cuts to revenue increases. Then 4 to 1. And then, last night, Senate Majority Leader Harry Reid threw in the towel and announced he'll introduce a bill with at least $2.7 trillion in cuts and no revenue increases at all. That's a clear win for Republicans, although they're certain to ask for more.

Last week, I predicted that the final deal would be $1.5-$2 trillion in cuts, no revenue and a stern lecture from President Obama. That was based on my belief that Republicans would not yield on taxes, and Democrats, unwilling to risk the economic damage from a default, would meekly agree to the cuts devised during the Biden negotiations. Such a deal wouldn't quite have met the Republican demand for $2.4 trillion--but I figured Republicans would not choose default over $1.5 trillion in cuts and no new taxes. In hindsight, I underestimated the Democrats' willingness to keep making concessions (in fairness, their capacity to do so seems practically limitless).

The extra trillion in cuts Reid conjured up appears to come from war spending, the formal name for which is Overseas Contingency Operations funds, or OCO funds. What are OCO funds? A bit of background: when Obama became president, one of his early, high-profile actions was to put the cost of the wars in Iraq and Afghanistan onto the books -- George W. Bush had kept them off budget to mask their costs. Administration officials applauded themselves for this act of honesty in budgeting, but one obvious effect was that the budget would grow. The CBO, the official budget scorekeeper, said the wars cost about $1.4 trillion a year decade. But Obama is (gradually) bringing both wars to an end, drawing down troops and thus also reducing costs. That's where the savings come from. Right now, CBO estimates future spending by project current costs forward, plus inflation. But if the budget were to formalize the drawdown that the president has already announced, CBO has said it would amount to a cut in outlays of $1.1 trillion over the next decade (and a savings of $1.4 trillion when you add in debt-servicing costs). So there's your extra trillion.

It's a bit gimmicky, yes. But Reid has good reason to think he might get away it -- Paul Ryan used the same gimmick in his budget, so Republicans are on record as accepting its validity.

But that shouldn't mask the larger point here, which is that the Democrats have capitulated utterly to Republican demands. Recall that last Tuesday, the bipartisan Gang of Six proposal included $2 trillion of revenue increases. Now, having offered to give this up, Democrats are sure to get no revenue.

As bad as this deal is for Democrats, it could have been worse (and could still get worse). Reid's deal would lift the debt ceiling through the 2012 election, so there wouldn't be another shakedown -- although John Boehner's counterproposal is built on a short-term raise that would require further cuts. Reid's proposal also protects the two sacred cows of entitlements and taxes. None of the cuts, as I understand it, come from Social Security or Medicare, so these programs would remain untouched and Democrats will have preserved their ability to run against Republicans on Medicare next fall. On taxes, the Bush cuts are still scheduled to expire next year. So if Obama wins reelection, he'll be in a position to raise revenue by letting some of them expire.

But there are still eight days until August 2nd. And that's enough time to give away a lot more.

Image credit: Jim Young/Reuters