How to Win the Dept Ceiling Negotiations

The GOP has a chance to win big in the dept ceiling negotiations; and likewise, a chance to ruin their election chances in 2012 if they screw up.  They keys to victory are: (1) do not raise the taxes people pay, (2) compromise, (3) help 2012 election chances.  The solution is simple.  The GOP should push for a deal on the following terms:

1. Spending cuts to equal 3 trillion over 10 years. 

1.1 This should include savings on medicare, medicaid, and social security.  The easy fixes are to change the method for the inflation adjustment, and to increase the retirement age for people under (age 1 year for people 30-45, 2 years for people 15-30, and 3 years for people under 15). 

1.2 This also should include savings on non-defense areas, including: (1) federal worker pensions.  The pensions for existing employees should not be changes; all new federal employees should have the defined benefits part of their pension removed.  1/2 that money should be savings, and 1/2 added to their 403B retirement plan as a matching contribution.  Existing employees should have option to move to the new system, but not be required to.  (2) hire 2 employees for every 3 who leave.  (3) Freeze domestic spending for 3 years.  (4) set across the board/cost of living salary increases to be equal to the average market salary increase minus .5% for 5 years (after 2-year pay freeze is over).  (5)  Limit bonuses to a max of $100 per employee, per year for 5 years.

1.3 This should also include savings on defense areas, including: (1) the President’s budget already includes a savings of over 100 billion a year from reduced costs associated from withdrawl from Iraqi and Afghanistan.  This should go straight to dept reduction, (2) re-insitute pay parity between military and civilian pay (so military pay would also increase by .5% less than pay increases outside government), (3) end all sign-up and retention bonuses, except for difficult to fill possitions, (3)  Freeze housing allowance increases (yes, the military has increased its housing allowance pay every year, despite the fact that housing prices have FALLEN year after year) until housing prices are back to 2006 levels, (4) implement pay parity for contractors — prevent contractors from billing the government for any salary increases that are higher than the salary increases given to federal workers for 5 years.  Also, do not have the government pay the cost of salaries for contractors above the highest salary for career government workers.  (no more hiring former government employees as “contractors” for twice their former salary).

2.  Agree to on-paper increases in revenue of about 1 trillion. 

2.1  After 2012 the law already automatically increases taxes.  At this time, there will be a political discussion again regarding taxes.  Any tax agreement made now will be re-evaluated post 2012.  SO, the GOP can easily pretend to comprimise by agreeing to remove loophole post 2012.  This will give Democrats cover for cutting entitlement spending, but will not actually increase taxes.

2.2  Agree to some, token, reductions in special intrest subsidies put into the tax code.  Let’s be honest, these are payouts to special interest groups.  They are really spending and should be cut.  Ideally, as part of a tax deal to lower the corporate income tax, while cutting these loopholes.  These should be tax-neutral.  However, since our corporate tax is so high, many corporations are holding money overseas to avoid paying taxes.  So even a tax-neutral deal would be revenue increasing because corporations would respond to the tax-cut by moving money to the US, where it would be taxes.  S0, the tax-cut itself may increase revenue (because it will incentivise the transfer of money).

2.3 agree to a Clinton-style millionaires tax, starting in 2013 or later.  This can be repealed after the election and should never take place.  However, it will help victory in 2012.  The economy needs to be Obamas.  He cannot be able to blame the GOP for it.  The GOP can allow this to pass, and the candidates can all say they will repeal it and that they don’t agree with it.  Good politics.  If the GOP loses in 2012, the existing tax increases already into law would be higher and broader.  Again, winning in 2012 is more importaint to taxes than what is negotiated here —here the goal should be to cut spending.

3 Spending that should NOT be cut.

3.1 It is very importaint not to cut anyone’s existing pay or benefits.  Whether this is Social Security, Medicare, Medicaid, or federal workers salary and benefits.  Cutting any of these would create challenges for winning in 2012.  Cutting the amount of money that social security recepients recieve would help Obama in Florida greatly, and a little bit around the country.  The cuts would likely be small, but they would lead to greater tax increases during his second term.  Cutting benefits for federal workers would cost the GOP Virginia, and thus the election.  The GOP has not won the presidential election without Virginia in over 50 years.  It may also cost the GOP the Senate, as Sen Web’s seat is up for graps (he is retiring), and will likely go the way of the presidential election.

3.2  It is importaint that spending cuts do not interupt services.  The GOP needs to show it can govern, and needs to act like a governing party.  This means measured actions.

3.3 Spending cuts should not target the Democratic base.  The worst thing the GOP could do is rally the Democrats who already do not like Obama to support him.  The GOP needs to not rile them up.  2012 will be won if the key issues are healthcare, social issues, and the economy.  The GOP cannot win if they issues are entitlements, benefits, government services, unions, federal employees, retireees, etc.  The GOP needs to not overstep.  Retired folks tend to vote GOP.  They don’t like gay marriage, don’t like healthcare reform, and don’t like their kids having trouble getting a job.   They are GOP voters unless the GOP picks a fight with them.  Many union workers don’t like healthcare, don’t like abortion, don’t like gay marriage, and want to vote GOP.  Anti-union messages will lose these voters, and with no real benefits.  Many federal works vote GOP based on social issues.  Many don’t like the healthcare law.  Many don’t generally like high taxes.  However, you cut their pay and the 30-40% who vote GOP will switch over.  That will lose Virginia; and will hurt in other states.  You can keep these votes by making changes simply not affect people currently recieving benefits or currently employeed.  It is also importaint to add that given the aging federal workforce, over 1/2 of federal workers will be retired in unter 10 years….so benefit cuts for future workers will generate the bulk of the savings, anyway, and so grandfathering in existing employees has minimal cost in the long run, and makes cuts much easier for now and 2012.  Likewise, retired folks tend to die; so the cost of grandfathering existing retirees is liveable.

Bottom line: The GOP needs to make a deal because (1) deals can be made that cut spending without really raising taxes (except on paper), (2) if a “fair” deal is not made it will hurt the GOP in 2012 — the economy needs to be Obamas.  He cannot be allowed to run against the Congress, and (3) the GOP needs to make sure not to give away voters or rile up the Democratic base.