Fin - Daniel Gross - US

Washington Continues to Play ‘Deal or No Deal!’

Contrary Indicator

'Deal or No Deal!' No, it's not the game show hosted by Howie Mandel. It's the tedious, drawn out process and discussion over whether the U.S. government, in a few weeks' time, will be able to pay its bills.

As the August 2 deadline approaches, murmurs are coming out on a deal -- a grand bargain, a small bargain, some kind of bargain — involving large reductions in spending and small increases in taxes. The opposition party always uses the debt ceiling as the time to make a statement and make the president suffer. This time, however, the Republicans have taken the debt ceiling hostage to an escalating series of demands. Once again, President Obama has summoned Congressional leaders to the White House, with the expectation that the principals will negotiate in good faith, split the difference and strike a deal. After all, that's what generally happens in Washington. As a result, the markets and most political analysts are betting on 'Deal!'

It's possible. But if you've watched Washington the past two years, and understand the dynamics at work, you might also bet on 'No Deal' -- at least for another few weeks. It's a sentiment that David Cay Johnston, the dean of American tax and fiscal reporters, shares. Johnston, a former New York Times reporter recently installed at Reuters, tells Aaron Task and me in the accompanying video that he is "very fearful" about a deal not happening and that he's hoping the finance community will put pressure on both parties to cut a deal.

Official Washington is putting a great deal of stock in the upcoming summit talks. The theory is that with the tock ticking down, a grand bargain will emerge. It could include some reductions/cuts/modifications on Social Security, Medicare, Medicaid, cuts on discretionary spending, the elimination of tax loopholes, maybe a little means testing for entitlements, and perhaps some higher symbolic taxes on the very rich. The deal will inevitably be one that nobody really likes but that everybody can endorse, even if they do so half-heartedly. The deal will thus avoid the embarrassing specter of default, and be large enough to take some tough issues (Republicans want to gut Medicare! Democrats want to raise taxes!) off the table for the upcoming 2012 season. After all, leaders who sign off on and vote for legislation today will be hard-pressed to run against it tomorrow.

That's the theory, anyway. The practice proves otherwise.

We've seen, time and again in the past few years, that Washington is not in a deal-making mode. Time and again, Republicans have indicated that they really aren't interested in being party to significant, far-reaching legislation that would help President Obama make the case that he's governing effectively. By definition, anything the president is for, almost every Republican in Congress is reflexively against—even on measures that they have championed and voted for in the recent past. That includes immigration reform, cap and trade, an individual mandate for health insurance. In the health care debate, the gang of six Senators worked and compromised for months, and then the Republicans in the gang simply walked away. As Jonathan Alter reports in The Promise, Republican Sen. Charles Grassley indicated to President Obama that, even if all his demands on health reform were met, he wouldn't vote for the final bill. Many of the Republicans on the bi-partisan debt commission, including Rep. Paul Ryan, refused to endorse its findings as legislation. Simple game theory (and the results of the 2010 election) shows that the lack of progress and action benefits the party that is out of power. Who has incentive to come to the table in a painful way now?

A second factor working against Deal! is the strange configuration of Washington. The House is controlled by Republicans, and the Senate is controlled by Democrats. That means it is possible for legislation to pass with the party caucuses in the two legislative chambers going in different directions. It's possible — even likely --for Obama to pull off a budget deal that doesn't get much Democratic support in the House and that doesn't get any Republican support in the Senate. That won't remove the issues from the 2012 campaign, because members of both parties will be on record as having opposed it. To complicate matters, some of the people in the room, including Senate Minority Leader Mitch McConnell and House Majority Leader Eric Cantor, have little to gain from a grand bargain and everything to gain from continued conflict.

Finally, as we've seen, a deal with the Congressional leadership doesn't mean the rank and file will come along. House Speaker John Boehner has shown that he can't always deliver his increasingly radicalized caucus for controversial votes — even when his own party controls in the White House. In the TARP voting in the fall of 2008, enough House Republicans ignored Boehner's pleadings to pass the bill that Treasury Secretary Henry Paulson had to go begging for votes to then-minority leader Nancy Pelosi on bended knee. Earlier this year, when Congress agreed to a short-term deal to cut spending and keep the government running, Boehner again had to turn to the Democrats for votes. Several members of his caucus, including presidential candidate Michele Bachmann, have indicated that they're really not interested in supporting a debt-limit increase. So here's the paradox: Striking a deal with Boehner is necessary to get a deficit-cutting package through the House, but it's not sufficient. In order to get House Democrats to vote for the bill, there will have to be significant revenue enhancements. But if Boehner signs off on a deal that can be construed as raising taxes, he might find his leadership challenged. Conventional wisdom holds that President Obama is between a rock and a hard place in these negotiations. Majority Leader Boehner is right there with him.

So what are the grounds for optimism? Johnston says that Obama's willingness to take marginal tax rates off the table could pave the way for a deal. "It's probably easier for Republicans to make a deal on tax expenditures," — i.e. eliminating loopholes and tax credits rather than raising tax rates. Of course, as Johnston notes, the issues being discussed — like tax breaks for corporate jets — involve very small amounts of money. And nothing is being done about the larger issue of very large corporations that pay exceedingly low taxes.

The consensus seems to be that the sheer weight of global concern will compel a deal, and soon. And I agree with Johnston that that is the most likely outcome. But given the large structural biases in favor of 'No Deal,' we may have to endure another few anxious weeks.

Daniel Gross is economics editor of Yahoo! Finance

Email him at grossdaniel11@yahoo.com; follow him on Twitter @grossdm.

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