Budget Aikido

Not many people understand the game - the long game - of Budget Aikido that President Obama has been playing. It's not easy to describe. Let's start with some highlights:

• Obama decided early that he had to support deficit reduction in a smart, but aggressive way to absorb, transform and redirect the quite hysterical energy the GOP was channeling on deficit worry and fear of debt collapse. This is the essential aikido method: absorb and transform the energy of your opponent so that, in essence, he defeats himself.
• Obama commissioned Simpson-Bowles in early 2010 to come up with a deficit reduction plan. The plan was released on December 1, 2010, and called for $4 trillion in deficit reduction over 10 years (combination of budget cuts and new tax revenues).
• Obama was mostly mum on the Commission's report, saying later that he needed a negotiating partner to work out a deal. But in an April speech, he fully accepted the target of $4 trillion. And in early summer, he began his negotiations with Speaker Boehner, working to put together a tax and spending deal, totaling $4 trillion over 10 years. The deal failed, after seemingly coming very close to agreement.
• The Budget Control Act followed the failed negotiations, running right up to the debt ceiling deadline before the bill was signed. The BCA put budget caps on discretionary spending, and set up a $1.2 trillion ten year sequester program, to start in January of 2012 (later moved to March 1, 2012), if a Budget Supercomittee failed to reach agreement on a similar sized deficit deal. The Supercommittee, predictably, failed to reach agreement.
• Both Defense and Non-Defense Discretionary budgets would suffer across-the-board cuts, beginning in 2013, as compared to the CBO baseline. In the first two years, the cuts would be year to year reductions; after that each category would rise, but stay well under the Baseline. Non-Defense took almost the total year-over-year drop in 2013; but Defense was set up to drop over two years - about $20 billion a year. And that brings us to the current problem. Both sides yelled and screamed last year (i.e., Democrats looking to Non-Defense Discretionary and GOP (especially the hawks) looking to Defense). But this year Dems lose little; GOP/Defense loses $20 billion. So GOP hawks are more concerned than Dems; meanwhile Tea Party Conservatives don't want to budge off the sequester levels, counting this their single big win over Obama.

But this is where the aikido and the misdirection comes in. Is the BCA sequester really the big win Conservatives think? Or is Obama quietly fine with the BCA, since, if you add in the $600 billion tax hike on the wealthy, the caps plus the sequester, this brings us to the $4 trillion 10 year deficit cutting target. Of course Obama and the Democrats would like to trade in the shotgun sequester for more targeted cuts plus new tax revenues; but if this proves a bridge too far, they will live with the sequester: no further cuts of magnitude for Non-Defense Discretionary in 2014, and a lot of key Republicans hate the $20 billion Defense cuts in the 2014 sequester plan.

So here comes the emerging Murray-Ryan mini-deal: removing the sequester for two years; substituting targeted cuts for the across-the-board cuts in the sequester; a Budget level set at about $1 trillion for 2014 (versus the sequester level of $966 billion) and new revenues from increased fees, asset sales, and adjustments to federal pensions. 

Will House Conservatives accept this? In a word, no. So Boehner will have to go to the Democrats to get this through. Dems will probably ask for an extension of unemployment compensation. If brought to a volte, it will pass, and Conservatives will be in full-throated revolt. If Boehner instead brings a clean CR up for a vote at sequester levels, Dems will pass and enough Tea Party members will vote no, since even with the sequester, Obamacare is being funded. If the vote fails, and the Murray-Ryan deal is not brought to a vote - Shutdown. So we either get a 2 year deal, with Tea Party folks rebelling against leadership; or we have a shutdown - both are good for Dems politically. The differing GOP energies (Leadership and Defense hawks versus Tea Party Conservatives) are being channeled in such a way that Democrats win, regardless of outcome.

Of course we can never let on that we can live with the sequester, because that might alter the game, if the GOP understood all this!

Taking the long view, there are two other key elements:

• In his 2011 negotiations with Boehner, Obama put Medicare and Social Security adjustments on the table in exchange for new tax revenues. When Boehner ultimately pulled out, he may not have realized that the future Budget Game had a new rule: No New Taxes, No Cuts to Medicare or Social Security. This has clearly been accepted by the GOP, since there has been little pushback against the Murray-Ryan mini-deal for having no entitlement cuts. Since new tax revenues are off limits to Republicans, Obama has now put entitlement cuts effectively off limits.
• The CBO has clearly demonstrated that the forward budget outlook is solid, with deficits returning to historically moderate levels, based on the BCA(with the sequester) and the 2013 tax hike on the well-to-do. So the aggressive Budget Busters of the Tea Party have no way to make the case for more cuts. They cannot make the case now; they will not be able to for the foreseeable future.

So Obama has taken entitlement cuts and additional budget cuts effectively off the table (complaining all the time about how unbearable these sequester cuts are, that the GOP made us accept!). And he has set the GOP Hawks to fighting with the Tea Party Conservatives - the result of which may well be that Dems get an extension of unemployment compensation.

All this from a failing, clearly incompetent President - who happens to have a Master's understanding of aikido!