Wednesday, August 3, 2011

Debt Deal Negotiations (Behind Closed Doors & Cold Beers)

If you are wondering how these people have been working, negotiating and talking (or not) over the debt deal, this is an interesting piece.  No conservitarian point to any of this...

'Grand Bargain' Seemed Close at Times, Only to Slip Away

WASHINGTON—On May 17, early in the hunt for a deal to cut federal deficits, White House negotiators gathered in the West Wing office of Vice President Joe Biden and contemplated ideas that once would have been considered heretical for a Democratic administration.

They talked about raising the Medicare eligibility age and reducing the annual cost-of-living adjustments in Social Security to save money—both earth-shaking propositions in the party. They decided those ideas could be put on the table in deficit talks.

"If you think big, the numbers add up quickly," said White House budget director Jack Lew.

But White House officials also agreed on something else that day: They could offer up such cuts only if Republicans agreed to significant tax increases.

Over the next 10 weeks, the quest for a deficit-reduction deal would collapse three times because of the inability to connect spending cuts with tax increases. Democrats said they were willing to trim Social Security and Medicare, but only in return for tax increases. Republicans rejected the trade-off.

Ultimately, the two parties came up with a $2.4 trillion deficit-cutting deal Sunday that has significant spending cuts but no new taxes—and doesn't do much, at least for now, to take on spending on big entitlement programs.

The story of the months-long process of arriving at that deal shows how the capital's emerging consensus on the need for significant spending cuts hasn't been matched by a bipartisan vision on what to do about taxes. But, even on that issue, a deal wasn't always out of reach.

The Biden Talks

From the start, House Republicans insisted on deep spending cuts if they were to raise the government's debt ceiling and avoid a possible default. Negotiations began in early May with a group of six lawmakers led by Mr. Biden.

Few gave the Biden group, dominated by partisan lawmakers, much chance of success. Yet Mr. Biden persuaded participants to check their talking points at the door and focus on what they could agree on. The vice president and House Majority Leader Eric Cantor, political opposites in age and ideology, developed a good rapport.

Within weeks, the group believed it could recommend at least $1 trillion in spending cuts in discretionary programs. The group found other areas of agreement, too, such as cuts to agriculture subsidies and federal worker pensions. Together, Mr. Cantor felt the group was close to $2.4 trillion—enough to meet House Speaker John Boehner's demand for a dollar in spending cuts for each dollar of new debt ceiling.

The group took on a spirit of compromise. When the topic of food stamps came up, Rep. Cantor backed off his preference for converting the program to a block grant, which he knew Democrats would oppose. Rep. James Clyburn (D., S.C.), a liberal Democrat, also showed openness. "I'm never going to agree to a block grant but I'm willing to listen to these other changes," he said. Soon, the group coalesced around cuts to a food stamp job training program and another that connects food stamps and energy assistance.

Mr. Biden eventually put taxes on the table. Mr. Cantor resisted. He told Mr. Biden privately that he could accept some tax increases, as long as they were offset by other tax cuts, making the overall package "revenue neutral." The two men even discussed $200 billion to $300 billion of offsetting tax increases, such as closing business tax loopholes, to produce that kind of package.

But in a late-June meeting, Mr. Cantor felt the Democrats in the room were "ganging up" on him, demanding to go further on taxes. He refused. Democratic officials in the room say Democrats were upping the pressure on taxes, but they say nothing in the conversation led them to believe Mr. Cantor was about to walk away. But he did. The Biden track hit a dead end.

The Back Channel

Meantime, secret talks had opened on a separate track between the White House and Mr. Boehner.

President Barack Obama has little interest in schmoozing lawmakers. But after last year's midterm elections, he made a decision to court the new speaker, according to one Democrat close to the president. In June, he invited Mr. Boehner to golf.

At Andrews Air Force Base on June 18, the pair played as a team and defeated Mr. Biden and Ohio's Republican governor, John Kasich. Afterward, the foursome retired to the clubhouse where, over cold drinks, Mr. Boehner suggested they work together to tackle the deficit in a big way. The two began a series of talks about what each wanted.

Mr. Obama said he would need tax increases to make structural changes to entitlement spending. Mr. Boehner opposed "tax hikes" but said he would support a tax overhaul that lowered rates and broadened the tax base by closing loopholes and eliminating deductions. That could produce more tax revenue but let Mr. Boehner say there wasn't a tax increase.

Mr. Boehner and Mr. Obama met secretly at the White House a few days later. That meeting was followed by several more. The talks turned public about two weeks later. The president convened a meeting of the top eight congressional leaders to gauge support for a what become known as a "grand bargain."

In the meeting, Mr. Obama made his case for a $4 trillion deal. "There's no sense dying on a small cross," he said, using one of Mr. Biden's favorite expressions. Central planks of his proposal included raising the Medicare eligibility age and slowing the growth of benefits in Social Security and other programs. In exchange, tax revenue would go up by some $1 trillion.

Aside from attacking spiraling deficits, a bipartisan accomplishment of this magnitude would give Mr. Obama a huge boost in his own 2012 re-election race, appealing to independent voters who more than any particular issue want Washington's leaders to work together to solve problems.

Outside the meeting room, though, both parties were hardening their positions. Democrats were getting nervous about how much ground their leaders seemed to be ceding. House Republicans rejected anything that looked like a tax increase. At a closed-door meeting of House Republicans, Mr. Boehner sought to distinguish between revenue increases and tax hikes, but GOP lawmakers didn't buy it.

The next day, a Friday, a small group of Boehner confidantes warned the speaker about the political risks of working with the president. "The danger to him is making a deal with no one standing behind him," said one. "We wanted to be sure he understood that, and was going into it with his eyes open."
Insight from CFO Journal

Meantime, the two sides couldn't agree on a key principle for how the tax code should be structured. The White House wanted to state up front that the code would at least maintain existing "progressivity," meaning the wealthy would bear the same share of the tax burden as they do now. Mr. Boehner's team balked, saying too many middle-class Americans pay no income taxes at all now.

Over the weekend, the grand bargain fell apart. On Saturday night, July 9, Mr. Boehner called the president to tell him he was through.

Back to the Table

At a news conference the next Monday, the president said it was time for both sides to make concessions and get control of the deficit: "If not now, when?"

Mr. Boehner said he, too, was frustrated. In a closed-door meeting, he told his colleagues he had walked away because Mr. Obama had made it clear he would overhaul safety-net programs only if taxes were raised.

"I haven't spent 20 years here fighting tax increases just to throw it all away in one moment," Mr. Boehner said.

Further wrangling left Mr. Boehner convinced neither a small nor a medium-size budget deal would work. A medium-size deal required at least some new revenue. And a small deal would have no tax increases but have only about $1 trillion in cuts. He figured only a big deal could offer enough payoff—and pain—for both sides to allow for the inclusion of tax increases.

The next day, he called Mr. Cantor and asked him to meet with White House Chief of Staff Bill Daley and Treasury Secretary Tim Geithner at the Capitol on a Friday. They reconvened two days later in Mr. Daley's West Wing office. Mr. Obama dropped by, and talks moved to the Oval Office.

Over the next couple of days, the parties reached a rough consensus for how a big deal could happen. It would include about $1.2 trillion in immediate spending cuts, and structural changes to Social Security and Medicare. Mr. Boehner tentatively agreed that a tax overhaul would generate $800 billion of additional revenue.

Then, the Senate's "Gang of Six," a bipartisan group looking for a deficit deal but left for dead in the spring, came back to life and proposed a nearly $4 trillion deficit-cutting package of its own.

The Gang of Six idea seemed to be a sign that momentum toward a big deal was growing. But, in fact, it complicated the fragile Obama-Boehner negotiations by calling for more than twice as much in higher tax collections as the Obama and Boehner camps had agreed to. Mr. Obama felt he had to ask for more.

The White House asked for an additional $400 billion in tax revenue, saying it was needed to get enough Democratic votes. White House officials say they got no signals the request would be a deal-breaker. But by week's end, the deal was dead.

On a Friday night, July 22, the president and Mr. Boehner held dueling news conferences, each blaming the other for the breakdown. The next day, the president called Mr. Boehner and offered to return to the $800 billion target, trying to save the deal. Mr. Boehner declined.

Within a few days, the White House would realize that taxes wouldn't be part of any agreement.

The Final Round

With little more than a week left before the Aug. 2 deadline, Mr. Boehner promised that Congress would come up with a solution. He couldn't strike a deal with Senate Democrats, so he pushed forward a GOP plan that was sure to die in the Senate. He barely got it through the House.

Meantime, Senate Majority Leader Harry Reid prepared a Democratic bill he knew would never pass the House. But both his plan and Mr. Boehner's contained the key idea: one round of spending cuts now, and a committee to recommend more later.

White House and congressional negotiators could see the two plans weren't that far apart. The question was what would happen if Congress failed to agree.

Under the House plan, the government would hit the debt ceiling again in a few months if the committee's ideas weren't passed by Congress—a prospect the White House was unwilling to entertain.

Senate Minority Leader Mitch McConnell and Mr. Biden led talks on how to write "triggers" into the legislation—painful, automatic cuts should Congress fail to enact more deficit reductions.

Final wrangling over defense spending almost sank the deal, but on Sunday afternoon, officials reached a compromise. At 8:15 p.m., Mr. Obama called Mr. Boehner to ask, "Do we have a deal?" There was a pause, then the president said, "Congratulations to you, too, John." White House aides listening in exhaled.

Over the final stretch, Republicans made clear that tax increases couldn't be in the mix for the initial cuts or triggers. And Democrats insisted that cuts to Social Security and Medicare benefits would have to be left out as well. The committee can look at those issues later.

Moments before Mr. Obama announced the long-awaited debt deal, Mr. Boehner began to sell it to his restive troops. "The White House bid to raise taxes has been shut down," he said.

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