Obama’s Trigger Option

There isn’t a better source for analysis of Washington economic policy than Keith Hennessey. His ability to go beyond the nuts and bolts of a particular proposal and identify the way it folds into the manner in which Washington does business as well as ferret out the hidden games and agendas is unmatched. That’s why you should read his latest post on the President’s new budget proposal.

When you do take a look at it pay particular attention to the section the debt trigger that Mr. Obama is putting forth. This is the fail-safe device which will presumably save us when the parties are unable to come to any sort of agreement. I didn’t pay much attention to it during the speech but it popped up this morning in a post by Ezra Klein and I’m beginning to wonder if this isn’t a key goal. Here’s Klein on the trigger:

Whether you assume we have till mid-May or early June, that’s not enough time for Republicans to rethink their position on taxes and nor for Democrats to come around to privatizing Medicare. So there’s going to have to be some placeholder attached to the debt ceiling vote. The ‘trigger’ attached to Obama’s budget is a likely candidate. If we’re not on a better fiscal path come 2014, it begins indiscriminately slicing away at a large swath of the federal budget and, importantly, at tax expenditures. So, in theory at least, it puts us on the path to deficit reduction without requiring us to make the hard decisions of deficit reduction right this minute. That’s probably the likeliest immediate outcome of all of these plans and proposals.

Got that? No agreement on anyone’s plan by the time we get to the debt ceiling drop dead date so both sides agree to the trigger mechanism. Presumably we fight this through the election and barring some huge mandate for change one way or the other, go back to fighting about the same subject in 2013 and assuming no compromise rely on the trigger to do the dirty work.

As Hennessey points out, there is a rather large bias in the trigger:

The President’s proposal is similar to past triggers in that it exempts all discretionary spending, Social Security, and interest on the debt. While past triggers limited the amounts that Medicare and Medicaid could be cut, the President’s trigger appears to exempt them entirely. The White House fact sheet says the trigger “should not apply to Social Security, low-income programs, or Medicare benefits.” Elsewhere it says the trigger applies only to mandatory spending.

Assuming that “low-income programs” includes Medicaid, this means the trigger appears to apply to at most about $300 B (if triggered this year) in “other mandatory” spending. Half of that would hit federal retiree payments, a quarter would hit veterans’ benefits (if not defined as “low income”), and the rest would hit smaller things like farm subsidies.

It therefore appears that the President’s trigger would exempt more than 90% of government spending from the automatic across-the-board cut.

The trigger would also raise taxes by implementing “across-the-board spending reductions … [in] spending through the tax code.” In other words, the trigger would somehow (how??) automatically reduce tax expenditures across-the-board (rather than raising rates, it appears). No past trigger has included a tax increase. This is new.

The fog lifts. The across-the-board trigger would apply to less than 10% of federal spending and would also raise taxes. And since it would apply only to itemized deductions, it’s only going to hit a portion of those paying income taxes, which is only a portion of all Americans.

The trigger is, in effect, a tax increase trigger on those who itemize deductions, with a little other mandatory spending thrown in for good measure.

The overwhelming impact of the trigger would be to raise taxes on those who itemize.  A much smaller portion of triggered deficit reduction would come from automatic spending cuts.

When you combine the automatic nature of this policy with the absence of specific policies needed to sufficiently reduce spending in the long run, the effect of this trigger would be to shift the burden of future entitlement spending increases away from deficits and onto higher income taxpayers. The future default would be that entitlement spending would grow at an unsustainable rate, and taxes on “the rich” would grow to hold deficits below 3% of GDP.

He notes correctly that structured as it appears to be, the trigger rewards those who favor increased spending financed by higher taxes to stonewall on budget cuts.

Keep an eye on this particular feature of the President’s proposal. If it does end up as a compromise feature of a debt ceiling increase, you can expect the Democrats to go into full stall mode. Assuming the President is reelected, they can continue to fight any significant spending cuts, justifying their actions by pointing to the trigger as the mechanism which will mediate irreconcilable differences.

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