A bipartisan proposal: Go medium to avoid fiscal cliff
December 5th, 2012
03:36 PM ET

A bipartisan proposal: Go medium to avoid fiscal cliff

By Michael O’Hanlon & Ron Haskins, Special to CNN

Editor's note: Michael O’Hanlon and Ron Haskins, a Democrat and a Republican, are senior fellows at the Brookings Institution where they specialize in national security issues and domestic policy, respectively. The views expressed are their own.

After a year of drama and high expectations, it appears increasingly likely that the current session of Congress will not solve the nation’s fiscal woes. Perhaps it was always too much to expect a lame duck to ride to the rescue. Especially after a close election and with a still-divided government, there is no clear consensus on who won a mandate to do what.

But we should be able to agree that the American people did vote for something to be done about the nation’s crippling deficit, without impeding economic recovery in the process. They also surely expressed a collective view that a balanced approach is essential. This assessment should lead President Obama and members of Congress to one central conclusion: if it proves impossible to “go big” and truly solve the nation’s long-term fiscal dilemma in the short time remaining before the New Year, they could go medium for now.

Our proposal would ask Republicans to accept slightly higher taxes than they prefer, but through reductions in deductions and exemptions as they advocate, rather than a raising of rates. It would ask Democrats to accept significant cuts to entitlements – but cuts that nonetheless phase in gradually and protect the basic integrity of all existing programs. It would also generally protect discretionary accounts including defense and domestic investments, which have already been hit by last year's deficit reduction legislation.

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Some of the problems with the existing positions of key leaders are becoming apparent.  President Obama wants to restore tax rates of the Clinton years on the rich and fully half of his deficit reduction dollars come from new revenues (it is not persuasive to count as savings costs from future military expenses that were never going to happen anyway).  The Republicans consider this a non-starter. Republican congressional leaders talk of raising revenues through closing of tax loopholes, but to date they are unwilling to be specific. No one puts social security on the table except through bromides such as an expressed desire to “strengthen it” for the long term. And the much-heralded Simpson-Bowles plan, while a brilliant piece of work in many ways, makes too many cuts in areas like national defense.

Perhaps we can still hope for a Christmas-season miracle, but failing that, it is time to start readying a backup plan to avert the huge disruption to our economy that would result from a plunge off the fiscal cliff. Further deficit reduction of some $2 trillion to $2.5 trillion would result from the following ten-year deficit reduction plan, to complement the $1.2 trillion in savings (mostly in defense as well as domestic discretionary accounts) already achieved under the first tranche of the 2011 Budget Control Act:

– Seek roughly $1 trillion in revenue increases, less than President Obama’s preferred $1.6 trillion but still a substantial amount. This is measured against a baseline that assumes continuation of the Bush tax cuts. To ensure maximum support from Republicans, these additional revenues should be achieved Simpson-Bowles style by capping deductions and exemptions rather than raising rates.

– Put social security on the table but in a careful and gradual way. In principle, Social Security is not the main cause of our deficit woes. But that is only because social security taxes are, relatively speaking, so high. The hefty taxes used to support social security in effect deprive the rest of the government of funds for other purposes. Therefore, changes to the system that make it less expensive to the Treasury are warranted. At a minimum, changes like adjusting the formula for cost-of-living increases in social security payments by roughly 0.5 percent a year will save more than $50 billion annually by 2020 without affecting anyone precipitously or dramatically. Most experts agreed that the current COLA overstates inflation.

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– Avoid further substantial net cuts in domestic discretionary accounts for now. While reallocation is appropriate, these crucial parts of the budget fund our investments in infrastructure, science and education while also providing safety in our airports, our food supply, and our borders among other things. Under existing stipulations of the Budget Control Act – that is, the cuts made last summer – their cost is already headed towards a smaller share of GDP than at anytime under Ronald Reagan or Bill Clinton. A modest $150 billion in additional ten-year savings is ample.

– Limit further defense cuts to $150 billion over ten years as well. Given last year’s budget agreement, this is ambitious enough. Today, U.S. troops remain in Afghanistan; Iran continues moving towards nuclear bomb capability; other parts of the Middle East remain in turmoil, and North Korea prepares missile launches while China squares off with other Asian powers over disputed islands and waterways. This is no time to cut the military deeply again based on hand-sweeping arguments about how the Department of Defense’s real budget is still bigger than during the Cold War. While that may be true, it is also true that as a fraction of GDP, it is headed towards 3 percent, historically a modest figure.

–Medicare reforms should be adopted that would produce $300 billion in savings over ten years. Three possible reforms, to be suggested in any deal but left to Congressional committees to detail in 2013, would be to gradually raise Medicare eligibility to age 67, to increase co-payments for high income recipients, and to reduce payment rates in areas of the nation that have high Medicare costs. For the long-term, congress should provide funds to the Centers on Medicare and Medicaid Services to conduct demonstrations on premium support in up to five states. The version of premium support envisioned by the Ryan-Wyden and Domenici-Rivlin proposals hold great promise for using market forces to control the growth of health care costs, but we won’t know if premium support will actually work unless we try it.

–Entitlement programs other than Medicare, Social Security, and Medicaid will cost $630 billion this year. We think it reasonable to achieve $300 billion in savings over ten years in these programs by adopting different COLA adjustments in civilian and military retirement programs, among other reforms.

This modest approach may not turn the Fiscal Grinch into a completely nice guy, but it will at least stop him from throwing the economy off the edge of Mount Krumpet this holiday season. And that may be good enough for now.

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Topics: Economy • United States

soundoff (11 Responses)
  1. Don't Cave In Mr President

    Tell Boehner to munch on your 8======>.

    December 5, 2012 at 4:26 pm | Reply
    • Don McLaughlin

      PLEASE.... Imagine that Mitt had won. Would all you commentators be wringing your hands and saying ... as a compromise... a show of good faith ..... you should give Democrats a little bit of the tax increases they promised the nation ( you know, the situation where the nation ran a sizeable surplus) and lay off Obama care to not shame the Democrats? You know you wouldn't think of it!
      Time to get real! The Malarky about hurting the "job creators ...... is ..... lies.

      Simply LOOK around you! America has HAD these LOWERED tax rates for roughly ten years ..... do you see prosperity and job growth popping up everywhere?

      We NEED revenue ... and we need JOBS ..... and austerity .... big cuts COSTS jobs... EVEN conservatives bite their lips but cry cutting defense budgets will cost jobs! So, dear reader will cutting ANY jobs .. until we are creating far more per month than now..

      December 9, 2012 at 2:02 am | Reply
  2. deep blue

    The entire idea of the "fiscal cliff" is to allow the true fiscal hawks to drive us off the cliff if both sides wait until the last minute to pass a compromise that doesn't solve our problems. In the worst case, we drive off the cliff. A last minute deal will pass (not a good one), but I'm starting to think maybe we should be hitting the accelerator instead of the brake.

    December 5, 2012 at 5:53 pm | Reply
  3. 200 TON HAMMER

    Republicans dont passed this through its like they are spitting in the face of the men and womens of the army navy airforce marines coastguards noaa merchant marines.

    December 6, 2012 at 8:15 am | Reply
  4. JAL

    Here is what I think has happened, the new republican leadership was without the old leadership during the past 4 years. New leadership is/was struggling. Now, the old leadership is taking a new interest and things just might get back to progress very soon. There does seem to be a massive re-alignment occuring right now. If I was a sophmore republican congress-person, I would be worried about my current stature.

    December 6, 2012 at 11:27 am | Reply
  5. Muin

    Senator Simpson made a good decision by coming to daily show to explain because there were some lies floating around about that proposal. However, once the Washington gets done with the grand bargain, even simpson-bowle won't be able to recognize their plan. I can guarantee it won't be anything like original at the end. And you bet that's going to be modified over and over the years by lobbyists because this is how we ended up with 14% tax for super wealthy. This is also why some corporations don't pay any taxes. Interest groups will keep adding things in years.

    December 6, 2012 at 1:55 pm | Reply
  6. j. von hettlingen

    Let's hope that both parties can reach a budget deal to avoid the fiscal cliff and the uncertainty that will damage the global economy. The US contributes to about 20% of the global economy. If the US suffers as a result of the fiscal cliff, it will wipe off the gains of its fragile growth completely and this will have repercussions worldwide.

    December 8, 2012 at 8:02 am | Reply
  7. Tom

    You talk about savings of $300 Billion by re formulating the COLA for, among others, Military Retirees. I am a military retiree and I haven't seen an increase to my retirement pay since I started drawing it 5 years ago. I would also like to ask why anyone would want to cut retirement benefits for military retirees? We've done far more than our fare share defending this nation. I don't think the stipend I receive for retirement is too out of line at all.

    December 8, 2012 at 8:14 pm | Reply
  8. rightospeak

    It is a circus with no hopes of improvement soon.Reality check : $16 trillion debt. $85 trillion with unfunded liabilities , 5X GDP. What will $2 trillion in 10 years do if you are running almost a $2 trillion deficit in one year ? Unless off shored jobs return ,we do not have a prayer. Further austerity will only depress the weak economy. Job creation without bringing back off shored jobs is a myth. Both Obama and Mitt were whisling dixie , they can not create jobs out of thin air. The printing press cash cow is beginning to worry most of the World and some countries started trade without using dollars. Bringing all troops home and slashing the bloted budgets is the only way out. War is not an option-we may all perish.

    December 8, 2012 at 9:00 pm | Reply
  9. rightospeak

    To improve things welfare for the rich needs to end, endless wars need to stop ASAP, off shored jobs must be brought back, illigal immigration stopped and some money saved from bringing all troops home should be spent on infrastructure. The profit in healthcare is excessive compared to the benefits to the pacients.There is too much confusion for the elderly with the HMOs. The emphasis in treatment should be prevention, not cleaning people's bank accounts. Many nurses can tell you horror stories-there should be some checks and balances better than what is in place now.

    December 8, 2012 at 9:30 pm | Reply
  10. art

    I am ready to off the cliff. Baehner. Tell the president that the republicans don't want to change their ideas just because we lost the top election. If the president wished to deal, then he should put something on the table. Not empty promises of what will come.

    December 10, 2012 at 9:12 am | Reply

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