As I peck at the keyboard there is plenty of scrambling in Washington to try to get together the votes needed to pass the ‘compromise’ package agreed by President Obama and Republican/Democrat leaders.

Hardcore Democrats bewail the ‘cuts’. Hardcore Republicans/Teapartyers bewail the fact that the cuts don’t go far enough and may bear down too heavily on defence spending. These positions echo public annoyance and confusion as to what it all means.

Leftists like Paul Krugman are furious with President Obama for ceding too much, to the point of near-hysterical babbling about the startling fact that Congress members elected with a clear mandate to cut federal spending have had the temerity to want to do so. Banana republic tactics! Extortion!

What does it all mean? Luckily we puny earthlings have the brilliant Keith Hennessey to explain it all.

And, as he warns, it all gets very complicated:

The key technical detail is that the Committee’s recommendations on taxes will be measured against a current law baseline for taxes. Under current law, certain taxes are scheduled to go up in 2013, most notably the individual income tax rates and rates on capital gains and dividends. Normally Republicans dislike a current law baseline on taxes, but in this case it helps them.

Here’s what that means for the Joint Committee:

  • If the Committee allows tax rates to increase in 2013 (aka “raise tax rates in 2013,” or “let the Bush-Obama tax cuts expire,” depending on your point of view), the additional revenues raised will not count toward the Joint Committee’s target since this is already current law
  • So raising these tax rates doesn’t help the Committee meet their $1.5 T deficit target.  That doesn’t mean they can’t include them in their legislation (they can), just that they can’t get any numeric benefit for doing so. That is incredibly important.

Hmm.

OK, Keith. You win. It’s complicated. But what does it basically mean?

While the Joint Committee process does not preclude tax cuts, it is tilted pretty heavily against them and toward spending cuts. That is huge.

That sounds OK. Anything else?

Senate Democrats get to punt this year and next on passing a budget resolution and making any politically difficult choices in the open. This is for me the only unequivocally bad part of this bill. It is process abuse, in which Senate Democrats are avoiding taking responsibility for proposing solutions to America’s biggest economic policy problems.

Everyone wants to blame the other side. No change. Next?

I think Team Obama thinks, because a failed Joint Committee would cause the trigger to cut defense spending an additional 10% and nondefense discretionary spending “only” an additional 8%, that Republicans will pay anything to get a new law, including agreeing to tax increases.

I think Congressional Republicans think this judgment is wrong, and this difference of opinion allows both sides to agree to this trigger and this new law

OK. High stakes political poker. No change:

I am reminded of the familiar scene in an action movie. The bad guy holds a hostage and a hand grenade while our hero, five feet away, points a gun at the bad guy. The bad guy threatens to pull the grenade pin and kill himself, the hostage, and our hero. He points out that the hero may not care about himself, but surely he doesn’t want to risk the life of this innocent young girl.

The hero, who we know is a kind and compassionate man, looks the bad guy straight in the eye and says, “Go ahead. Blow us all up. I don’t care about her, and I don’t care about myself, as long as you’re killed in the process as well. We both know you won’t pull that pin because you won’t kill yourself. So let her go and let’s end this peacefully.”

The bad guy backs down because the hero has demonstrated the threat provides no relative advantage. As long as the exploding grenade would do sufficient damage to the bad guy (death), it doesn’t matter that the hero suffers a greater loss (death X 2). The bad guy doesn’t want to carry through with his threat any more than the hero does.

NB: Superb passage on negotiating technique and ‘relative advantage’.

But is the underlying problem of dangerously high public spending in the USA solved by this compromise? Or not?

$2 trillion of spending cuts is big for Congress but small relative to our underlying fiscal problems. If this bill becomes law and if the fall Joint Committee process is successful, the remaining spending problem will be more than an order of magnitude larger than this accomplishment.

If you think this summer has been painful or dread the battle of this fall, you ain’t seen nothin’ yet. Wait until Congress wrestles with the big stuff.

As I expected. Important step in the right direction, but a long hard road ahead.

Read Keith’s three magnificent posts in full. You’ll learn something.