Archive for January 26th, 2011

Can They Work Together?

President Obama delivered a very well crafted State of the Union message last night, in which most of his applause lines drew applause from both Speaker Boehner and Vice President Biden behind him.   The tone was bi-partisan or even non-partisan, the theme was the American dream, and he stated the uncontroversial goal of needing to create a better future.  He also made an invitation to the Republicans to work with him, build compromise, and face the challenge of the future together — noting that if they don’t work together, nothing will get done.   That is the nature of a divided government.    The message was clear: the times require action, inaction will harm the country’s competitiveness in this new era of globalization.

He’s right in all of that, but those are easy words to say.    Representative Paul Ryan’s Republican response also correctly pointed out the dangers inherent in high debt and deficits, and the need to fundamentally re-organize how the government operates.  Yet he gave few specifics either — criticizing the debt and high deficits is easy.   In general, the two sides have a lot of potential common ground.   The President’s framing of the problems ahead show four areas where compromise is possible:

1.  Investment in the future.   Although the Republicans in general dislike such spending, many of them are in districts or regions that could benefit greatly from government support for infrastructure and research and development.    Republicans have historically supported such endeavors if they are done in a way that doesn’t seem too intrusive to markets or wasteful.   This is an area where they could support some of the programs Obama discussed, but in exchange for compromise on other fronts.

2.   Regulatory reform.   The Obama Administration has made simplification of the tax code, and cutting regulations a priority.  Again, that’s easy to do in theory, but in practice it’s hard to change entrenched bureaucracies and rules crafted with the help of well funded lobbyists.   The executive branch can and will make some changes on its own, but significant moves often require Congressional action.   This seems an issue the Republicans could grab, creating a “wish list” of regulatory cuts that they can bring into negotiations.    Their message: cutting regulations needs to be meaningful, and might hurt Democratic sacred cows.

3.  Immigration reform.    This is a political winner for the Democrats, as the Latino vote is the largest growing segment of the electorate, and right now GOP rhetoric is giving the Democrats a chance to claim this block as their own.   But outside of that issue, there are  many reasons to think the GOP should do well with Latinos.   If some kind of significant immigration reform deal could be struck, the GOP may find the political weight of the immigration issue lifted from their backs.   The tea partiers will be upset, but they’ll get over it (and they may find themselves increasingly marginalized anyway).    After all, there was near success on this issue under President Bush in 2007 so they should be able to do something in 2011.

4.   Budget cuts and tax increases.    President Obama put the Republicans on notice that the tax cut to the richest Americans would be part of the campaign in 2012.   Assuming the economy is showing job growth, the argument that “we can’t cut taxes in a recession” would be trumped by “we have to do meaningful things to bring down the debt.”

There should be a lot of room for compromise on cuts in discretionary spending; both sides want to do that.  Yet significant reform of Social Security, Medicare and Medicaid — the so-called entitlements — is the only way to fundamentally alter the structure of the budget.   Yet Democrats have done well with those issues, criticizing Republican calls to cut or privatize these programs.   They have no interest politically in being in league with the GOP to talk about “endangering Social Security.”  Republicans as well realize that such suggestions could harm them in 2012, they have usually avoided specifics on entitlement reform.

On the other hand, Americans pay the lowest taxes in the industrialized world.   Increasing tax rates would be one way to raise revenue.   While some seem to think cutting taxes increases revenue all the time, few serious economists think we’re at a point where tax hikes done right will decrease revenue.    Moreover, the economic impact of tax hikes is usually about the same as spending cuts — either way demand is cut.

Republicans have no political reason to compromise here.  They have found that an anti-tax message does them as much good as the ‘protect social security’ message does Democrats.   Yet there are creative ways they can compromise on taxation.   One is to shift new revenues to the states instead of the federal government.    At the same time, federal programs could also be moved to the state level, meaning that the federal budget is cut.   To be sure, the money given to states must be enough to pay for the programs they would take over, but the Republicans may find it much easier to sell “de-centralizing” bureaucracy than to cut popular programs.  States would have minimum standards to maintain, but could experiment at being more efficient.    If they could manage programs more efficiently than Washington there would be real savings.   Tax increases sent directly to states could be part of a “dismantling” of bureaucratic rule.

In exchange, the Democrats can support entitlement reform.   These do not have to be major, and clearly privatization is not the way to go.   But what if incentives were made to further increase the retirement age?   One could statistically determine how much the system would save if one retired at 75, 78, 80 or 82.   As long as one didn’t draw into the account until a certain age, one would gain more monthly.   The game could be structured to be a significant net savings for the system, but many individuals might opt not to pull money out until a later time, either because they enjoy their work, or they’re gambling they’ll live especially long and want more steady income late in life.   There are likely numerous ways to save money if the two sides share ideas and are willing to compromise.

Tweaks to health care reform will likely remain elusive for now.  The GOP plans to run on “repeal and replace” in 2012.  Chances are great that they’ll fail, and only then will they be content to tweak the system for improvements.   Making the safe assumption that Obama wins in 2012 and the GOP holds the House, that could be an impetus for some restructuring of the reform passed last year.

The key questions at this point are political and ideological.   Ideologically, can each group accept something less than what they want without falling into the trap of believing they are somehow “compromising principles.”   Politically, can they decide its more important to solve problems then generate arguments and ammo for the next election cycle?

A compromise is usually something neither party really likes.   Pragmatists focus on what they accomplished, the idealists obsess on what they had to give up.      With Obama’s approval ratings up, Republicans have lost some of the wind in their sails, they can’t just coast on public anger over what happened in 2009 or 2010.   The transformation many on the left hoped the 2008 election would bring also isn’t going to happen, the American public remains cautious and centrist.   In our system, change is slow.

But perhaps the two sides can move from spectacle to problem solving.   That seems to be what the voters want.

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