Bloomberg News

Obama-Boehner 2011 Near-Deal Blueprint for New Debt Talks

November 09, 2012

Obama-Boehner 2011 Failed Talks Give Blueprint for Budget Deal

U.S. Speaker of the House, Rep. John Boehner and U.S. President Barack Obama in Washington, on March 20, 2012. Photographer: Alex Wong/Getty Images

The blueprint for a deal to avoid a fiscal nightmare early next year may be found in the failed debt negotiations between President Barack Obama and House Speaker John Boehner in mid-2011.

Part of their talks on a $4 trillion deficit-cutting plan included a gradual increase in the Medicare eligibility age to 67 and an alternative yardstick for calculating inflation that would reduce annual Social Security cost-of-living adjustments.

Democratic-leaning interest groups including the AFL-CIO are mobilizing to oppose any cuts to Medicare and Social Security. Still, Obama could use this as a starting point to strike a multitrillion-dollar deal on debt reduction with Republicans, said William Daley, a former White House chief of staff who was at the center of the 2011 negotiations.

“It’s logical that that’s where you’d go back to, the points where there was either agreement or close to an agreement and try to begin there,” he said. The president and Boehner were “80 to 85 percent of the way there” on a debt reduction plan during negotiations to raise the U.S. debt limit in 2011, he said.

Obama Success on Fiscal Cliff May Hinge on Congress Ties

Boehner and Obama had settled on the contours of an agreement that included revenue increases, spending cuts and changes to lower the long-term costs of entitlement programs. Before the talks collapsed, Boehner was willing to accept $800 billion in revenue increases and Obama was ready to settle for $1.2 trillion.

Expanded Majority

Congress will meet starting Nov. 13 to try to avert the so- called fiscal cliff, a combination of automatic spending reductions and expiring tax cuts that amount to $607 billion and are scheduled to begin in January.

The Treasury bond market is expecting the government to fail to find an agreement. Rates on longer-term Treasuries have converged with those of non-U.S. government bonds globally. Treasuries due in 10 years and more yield 18 basis points more than similar-maturity debt of non-U.S. government bonds globally, down from a peak of 104 basis points in February 2011, according to Bank of America Merrill Lynch Indexes.

Yields on 10-year Treasuries currently below 1.7 percent indicate that investors expect the gross domestic product may shrink by 0.3 percent next year as the fiscal cliff takes effect, according to JPMorgan Chase & Co. (JPM:US)

Election Impact

The White House and congressional Democratic leaders view the president’s re-election and Democrats’ expanded majority in the Senate as a mandate for generating new revenue by allowing the George W. Bush-era tax rates for wealthier taxpayers to expire as scheduled Dec. 31. They want to pressure Republicans to give up their opposition to raising income taxes on couples earning more than $250,000.

Obama is scheduled to make a statement at 1:05 p.m. today about his plan for spurring economic growth and reducing the deficit, a White House official said.

In a conference call with reporters yesterday, David Plouffe, Obama’s senior political adviser, said the election results show the public “clearly chose the president’s view of making sure that the wealthiest Americans are asked to do a little bit more” to reduce the U.S. budget deficit.

Graphic: Balance of Power in the 113th Congress

“Trying to get this done as soon as possible, as broadly as possible, as deeply as possible makes the most sense,” New York Senator Chuck Schumer, the No. 3 Democrat in the chamber, said yesterday.

The election brought a change in rhetoric, with both sides mentioning elements of the failed 2011 deal.

Boehner, Reid

Boehner, of Ohio, signaled openness on Nov. 7 to a deal with revenue -- though without higher tax rates -- and cited his negotiations with Obama. The same day, Senate Majority Leader Harry Reid of Nevada said he wouldn’t “draw any lines in the sand” and wanted to work with House Republicans on a deal. Schumer said Boehner’s comments “open the door” to a big plan.

“The leverage is different now,” said Jim Kessler, senior vice president at Third Way, a Washington-based Democratic policy group, and a former Schumer adviser. “Obama could not risk some real financial catastrophe because they breached the debt ceiling and Republicans knew it. Now Obama’s got a second term and the tax cuts and sequestration fall on things Republicans are historically more vulnerable on.”

Capitol Skepticism

Even so, many people remain skeptical that such a deal is possible, both politically and substantively.

While Boehner cited his willingness to compromise on revenue, he ruled out the type of rate increases for high earners that the president is demanding. Schumer said while he was “very heartened by the tone” of Boehner’s remarks, Democrats weren’t convinced that Boehner “would turn on a dime” in terms of policy.

Boehner also rejected a summit-style meeting between Obama and congressional Republicans.

The Republican leader in the Senate, Mitch McConnell of Kentucky, said in an e-mailed statement that “some people out there think Tuesday’s results mean Republicans in Washington are now going to roll over and agree to Democrat demands that we hike tax rates before the end of the year. I’m here to tell them there is no truth to that notion whatsoever.”

Republicans prefer to extend current tax rates for another year while the two sides work on an overhaul of entitlement programs and the tax code.

Entitlements

Republicans are demanding fundamental changes to entitlement programs in exchange for revenue increases. The only plan on the table -- a Republican proposal to partly change Medicare to a voucher system for future recipients -- is a nonstarter for Democrats.

“I’m very happy that Boehner is making the outreach but I guess I’m a little jaded here,” said Bill Hoagland, a former staff director for the Republicans on the Senate Budget Committee. “I think we still got a ways to go.” Hoagland is working with former Senate Majority Leaders Bill Frist, a Republican, and Tom Daschle, a Democrat, on a bipartisan plan to overhaul health care.

Senator Kent Conrad, a North Dakota Democrat and chairman of the Budget Committee, expressed optimism only about a smaller deal, based on Boehner’s comments.

“I heard something different in his tone and I heard something different in the language, an opening of the door to consideration of revenue,” Conrad said in an interview with Bloomberg Television’s Peter Cook on “Capitol Gains,” which airs Nov. 11. Conrad, who is retiring after this session, said he is optimistic that “a basic framework could be laid out during the lame duck and a down payment made.”

‘New Deal’

Conrad said in a separate interview that Democrats will be less open to the level of spending cuts that Obama earlier offered Boehner because the 2011 law that increased the debt ceiling included $900 billion in cuts. “It’s going to be a new deal because things have changed and changed quite dramatically,” he said.

If the president attempts to resurrect his talks with Boehner including entitlement costs, he’ll have to overcome resistance from his own caucus and Democratic interest groups.

On Nov. 7, Reid told reporters that Democrats were “not messing with Social Security” as part of debt talks. He said he would oppose changes to the way benefit increases are calculated on an annual basis, known as chained CPI.

The alternative inflation index would be used to determine annual cost-of-living adjustments for millions of Americans as well as the dollar limits of income tax brackets, which are adjusted annually for inflation.

Social Security

The idea may anger Democrats and Republicans because it could mean paring Social Security by $112 billion over 10 years, raising taxes by $72 billion and cutting pension and veterans’ disability payments by $24 billion, according to estimates last year by the nonpartisan Congressional Budget Office and the Joint Committee on Taxation.

The idea was discussed in debt talks led by Vice President Joe Biden and a bipartisan Senate group.

Conrad said he doesn’t think the concept is tantamount to a cut in Social Security benefits.

“It’s just a more accurate measure of inflation than the ones currently being used,” he said. “Economists of every philosophical stripe say if that’s part of an overall package that’s balanced, that’s not an unreasonable thing to do.”

Democratic interest groups say they disagree.

The AFL-CIO announced yesterday that retirees and activists from the progressive and religious communities will host as many as 100 events outside lawmakers’ offices, health clinics and other sites during Congress’s lame-duck session.

“Chained CPI is a cut to Social Security but just with another name,” said Jeff Hauser, an AFL spokesman.

To contact the reporters on this story: Heidi Przybyla in Washington at hprzybyla@bloomberg.net; Mike Dorning in Washington at mdorning@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net


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