Loose Canons

Beware of ‘If-Then’ Budget Deals

The tax increases tend to happen while the spending cuts don't.

By 7.11.11

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From last week's events it's fair to conclude that President Obama and congressional Democrats are willing to risk default on America's debts in order to get tax increases.

On August 2 the government will run out of borrowed money, all $14 trillion of it. And -- despite what you heard from a few idiots posing as "constitutional scholars" last week -- under the 14th Amendment the president can't borrow more unless congress authorizes it.

So negotiations have gone on for months, in the Senate Gang of Six, the Biden-led talks and several White House meetings, all to no avail. The reason there has been no success is that the Democrats want $2 in tax hikes for every dollar in reduced spending and they want to delay the spending cuts so they don't take effect until a future date (before which they can renege on the deal and restore the cuts).

On July 5, playing the role of a marriage counselor, President Obama urged "both sides" to get out of their "comfort zones" to reach a debt ceiling deal. It was classic Obama: posing publicly as the disinterested arbiter urging compromise while privately making irreconcilable demands for tax hikes.

In June, after a disappointing May unemployment report, Obama said, "There are always going to be bumps on the road to recovery." Last Friday, he ran into a bigger bump in the latest unemployment report. It showed that the supposed economic recovery has stalled.

Fully 9.2 percent of Americans -- over 14 million -- are unemployed, an increase of about 545,000 since March. (The 9.2 percent is misleadingly small given the fact that another 252,000 Americans had given up looking for a job and weren't counted among the unemployed.)

It was the 29th straight month in which unemployment was over 8 percent, the longest period of unemployment that high since the 1930s. One big reason the report wasn't worse is that the Federal Reserve -- by pumping newly-printed money into the economy -- has lubricated the job market with free-flowing money. But the "quantitative easing" program has come to an end. The Obama administration - by pumping some of the Strategic Petroleum Reserve oil into the commercial system - is unleashing a back-door ‘stimulus' which is also holding inflation down.

After the unemployment figures were released, Obama gave a speech in which he blamed the stalled economy on the Japanese tsunami, the Greek economy and everything except his spending spree.

Also on Friday, Senate Budget Committee Chairman Kent Conrad (D-ND) briefed Obama on his secret budget plan endorsed by a majority of Senate Dems. It called for $2 trillion in tax hikes and $900 billion cuts in the Pentagon budget, both over the next decade, and made no cuts to entitlements.

The transparency of Conrad's ploy is such that only the media will fall for it. Last December the Democrat-controlled Senate voted down a bill to raise taxes on people earning over $250,000 a year. On May 17, it failed to pass a bill to cut oil companies' tax breaks and on June 14, it voted down a bill to end ethanol tax subsidies. Conrad can't get Democrats to vote for tax hikes, so why does he think Republicans will be dumb enough to bail him out?

Democrat desperation for tax hikes -- and refusal to make big cuts in federal spending -- is plain in the statements of other Dem leaders. Senate Majority Leader Harry Reid (D-NV) said cuts in Social Security were "off the table." And, as Senate Minority Leader Mitch McConnell (R-KY) said on Fox News Sunday,"...the White House and congressional Democrats are insisting on big tax increases as a condition to do anything on the spending side."

What comes next? Two things. There will be a last-minute deal to raise the federal debt ceiling in the short term. And -- because the Fed has stopped pumping money into the system -- inflation will quickly become a growing problem.

Remember "stagflation"? A stagnant economy burdened with inflation produced "stagflation" in the Ford and Carter years. You heard it here first: unless the deal raising the federal debt ceiling includes massive spending cuts -- including a reduction of the entitlement programs -- stagflation will be back before year's end.

There's an obstacle that Republicans have to overcome: they need -- at all costs - to avoid an "if-then" deal.
It's the classic Washington deal that Republicans have fallen prey to so often. The "if-then" deal is made when Republicans agree to a compromise now in return for which the Democrats promise later action on their half of the compromise.

Circumstances change, deals are reneged on, campaign imperatives intervene, and "later" never comes.
The only way to make a deal is to have all elements of the deal legislated together to become effective at the same time. If Republicans don't do this, they'll betray every voter who chose a Republican candidate last year, and may well doom those Republicans - and more -- next year.

House Speaker John Boehner reportedly offered Obama just such a deal last week.  Boehner's proposal is a classic rope-a-dope, and Obama wasn't the one getting lassoed. According to reports in the Wall Street Journal and the Washington Post, Boehner offered a deal that extended Bush-era tax cuts for middle-class taxpayers but let capital gains taxes and rates for upper-income taxpayers expire in exchange for a Democratic agreement to rewrite the tax code by the end of next year to benefit all taxpayers.

It was a classic "if-then": if you do something now, then we'll do something later. It's the Wimpy Democrats: they will gladly pay us Tuesday for a hamburger today.

Trying to figure out if the Republicans would fall for this -- again -- I asked one of my favorite Hill sources point-blank: why should we believe they won't get suckered again? His answer was, "Two words: Mitch McConnell." That's a good enough answer for me, but there's comfort in adding two more words: "Jeff Sessions."

Yesterday, on "Face the Nation", Alabama's Sen. Jeff Sessions, ranking member on the Senate Budget Committee, warned that a deal -- even one endorsed by Republican congressional leaders -- won't necessarily be approved. (McConnell has said the same on earlier occasions.)
Messrs. McConnell and Sessions are in the right place and the right time to prevent the Republicans from falling into the usual "if-then" trap. They need to stick to their guns.

Before the Sunday session, Speaker Boehner had backed off from the "big deal" idea he and Obama publicly favored.

A small long-term deal benefits only Obama and Senate Dems. They want to blame Republicans for failing to cut spending while avoiding the blame Democrats should bear for refusing to abandon their demand for massive tax increases and refusal to touch entitlements. A short-term deal is better for Republicans so they can keep the pressure on Obama and finally achieve the massive spending cuts we need if our economy is to recover.

At this writing, the Sunday evening White House negotiations have yet to occur. This morning will have dawned without a deal being reached because Obama won't compromise on spending and Republicans can't compromise on tax hikes without betraying the mandate they received last November.

There are 22 days between now and August 2. As that number diminishes, the Republicans' hand only grows stronger.

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About the Author
Jed Babbin served as a Deputy Undersecretary of Defense under George H.W. Bush. He is the author of several bestselling books including Inside the Asylum and In the Words of Our Enemies. He is coauthor (with Herbert London) of the new book The BDS War Against Israel. You can follow him on Twitter@jedbabbin.