Finding Compromise

President Obama won a second term in office yesterday, receiving 50.3% of the popular vote But the Republicans held control of the House of Representatives and Americans remain deeply divided. Historically, the party in control of the White House loses some congressional seats in the midterm elections. That means that any legislation passed into law over the next two years, and likely the next four years, is going to have to be agreed to by both a Democratic President and a Republican House.

Perhaps the Democrats and Republicans will face up to the fact that, for better or worse, we’re stuck rowing the same boat together for the foreseeable future, so it’s time to strike a Grand Compromise setting the United States’ long-run fiscal house in order. Any objective observer can see that this calls for both tax increases and entitlement reform. Perhaps some leaders on both sides will emerge from the embers left by the election wars to carry such a vision into action. But based on what I have seen from the key players so far, I personally am not expecting to see that happen.

Another idea is to try to break the problem into smaller pieces. Can we at least identify a few very limited measures that we could all agree on? Let’s start with the fiscal cliff. (Please!) How about submitting legislation tomorrow for a one-year extension of the current patch for the Alternative Minimum Tax, and vote the AMT patch up or down as a stand-alone proposition? Next maybe try a one-year extension of the existing payroll tax levels, again yes-no all by itself. If we could just agree on those two items, it would take $300 B out of the $720 B shock referred to as January’s fiscal cliff.

The same principle could be applied to one-year extensions of the Bush tax cuts– break them down into their individual elements and vote on them one-by-one. Do we keep the 10% bracket for another year, or allow it to rise to 15%? Keep 25%, or raise to 28%? And so on down the line. Any single extension that the Democrats and Republicans can’t agree on automatically reverts to the pre-Bush values, following existing law.

Now, Republicans might naturally see this strategy as divide and conquer, because the outcome would obviously be that taxes on the richest Americans would go up as the outcome of this process. There also is the more difficult issue of how to reach an agreement with Republicans on the debt ceiling.

My answer to this is, how about trying the same strategy on the spending side? For example, before going into extending any of the Bush tax cuts, decide on the defense budget, again as a stand-alone measure. Obviously this is going to require some real compromise– the outcome will have to be more than the Democrats want and less than the Republicans want. But the Republicans would view it as a more favorable outcome than if no agreement is reached, since the status quo calls for a 9.4% cut in defense spending.

For that matter, breaking spending on other categories into individual pieces would give the Republican House significantly more power. For example, if funding for Planned Parenthood or specific regulatory agencies become stand-alone line items to which the House has to give its approval, the Republicans are brought in on some of the issues on which they hold the strongest views. More broadly, the essence of pork barrel spending is the agglomeration of the pet projects of individual representatives. The more that spending measures can be broken down into separate stand-alone consideration, the more likely it is that the outcome would be in the overall public interest and serve the principles of fiscal prudence and democratic rule.

When I personally face a challenge that looks insurmountable, the strategy that works best is to try to break it down into manageable pieces. Is there some reason the same principle wouldn’t work at the national level?

Or, maybe some of you have a better idea.

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About James D. Hamilton 244 Articles

James D. Hamilton is Professor of Economics at the University of California, San Diego.

Visit: Econbrowser

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