The blueprint for a deal to avoid a fiscal nightmare early nextyear may be found in the failed debt negotiations between PresidentBarack Obama and House Speaker John Boehner in mid-2011.

Part of their talks on a $4 trillion deficit-cutting planincluded a gradual increase in the Medicare eligibility age to 67and an alternative yardstick for calculating inflation that wouldreduce annual Social Security cost-of-living adjustments.

Democratic-leaning interest groups including the AFL-CIO aremobilizing to oppose any cuts to Medicare and Social Security.Still, Obama could use this as a starting point to strike amultitrillion-dollar deal on debt reduction with Republicans, saidWilliam Daley, a former White House chief of staff who was at thecenter of the 2011 negotiations.

“It's logical that that's where you'd go back to, the pointswhere there was either agreement or close to an agreement and tryto begin there,” he said. The president and Boehner were “80 to 85percent of the way there” on a debt reduction plan duringnegotiations to raise the U.S. debt limit in 2011, he said.

Boehner and Obama had settled on the contours of an agreementthat included revenue increases, spending cuts and changes to lowerthe long-term costs of entitlement programs. Before the talkscollapsed, Boehner was willing to accept $800 billion in revenueincreases and Obama was ready to settle for $1.2 trillion.

Congress will meet starting Nov. 13 to try to avert the so-called fiscal cliff, a combination of automatic spending reductionsand expiring tax cuts that amount to $607 billion beginning inJanuary.

The White House and congressional Democratic leaders view thepresident's re-election and Democrats' expanded majority in theSenate as a mandate for generating new revenue by allowing theGeorge W. Bush-era tax rates for wealthier taxpayers to expire asscheduled Dec. 31. They want to pressure Republicans to give uptheir opposition to raising income taxes on couples earning morethan $250,000.

Obama is scheduled to make a statement at 1:05 p.m. today abouthis plan for spurring economic growth and reducing the deficit, aWhite House official said.

In a conference call with reporters yesterday, David Plouffe,Obama's senior political adviser, said the election results showthe public “clearly chose the president's view of making sure thatthe wealthiest Americans are asked to do a little bit more” toreduce the U.S. budget deficit.

'Get This Done'

“Trying to get this done as soon as possible, as broadly aspossible, as deeply as possible makes the most sense,” New YorkSenator Chuck Schumer, the No. 3 Democrat in the chamber, saidyesterday.

The election brought a change in rhetoric, with both sidesmentioning elements of the failed 2011 deal.

Boehner, of Ohio, signaled openness on Nov. 7 to a deal withrevenue — though without higher tax rates — and cited hisnegotiations with Obama. The same day, Senate Majority Leader HarryReid of Nevada said he wouldn't “draw any lines in the sand” andwanted to work with House Republicans on a deal. Schumer saidBoehner's comments “open the door” to a big plan.

“The leverage is different now,” said Jim Kessler, senior vicepresident at Third Way, a Democratic policy group, and a formerSchumer adviser. “Obama could not risk some real financialcatastrophe because they breached the debt ceiling and Republicansknew it. Now Obama's got a second term and the tax cuts andsequestration fall on things Republicans are historically morevulnerable on.”

Even so, many people remain skeptical that such a deal ispossible, both politically and substantively.

While Boehner cited his willingness to compromise on revenue, heruled out the type of rate increases for high earners that thepresident is demanding. Schumer said while he was “very heartenedby the tone” of Boehner's remarks, Democrats weren't convinced thatBoehner “would turn on a dime” in terms of policy.

Boehner also rejected a summit-style meeting between Obama andcongressional Republicans.

Republicans prefer to extend current tax rates for another yearwhile the two sides work on an overhaul of entitlement programs andthe tax code.

Republicans are demanding fundamental changes to entitlementprograms in exchange for revenue increases. The only plan on thetable — a Republican proposal to partly change Medicare to avoucher system for future recipients — is a nonstarter forDemocrats.

“I'm very happy that Boehner is making the outreach but I guessI'm a little jaded here,” said Bill Hoagland, a former RepublicanSenate Budget staff director. “I think we still got a ways to go.”Hoagland is working with former Senate Majority Leaders Bill Frist,a Republican, and Tom Daschle, a Democrat, on a bipartisan plan tooverhaul health care.

Kent Conrad, a North Dakota Democrat and chairman of the SenateBudget Committee, expressed optimism only about a smaller deal,based on Boehner's comments.

“I heard something different in his tone and I heard somethingdifferent in the language, an opening of the door to considerationof revenue,” Conrad said in an interview with BloombergTelevision's Peter Cook on “Capitol Gains,” which airs Nov. 11.Conrad, who is retiring after this session, said he is optimisticthat “a basic framework could be laid out during the lame duck anda down payment made.”

Less Open

Conrad said in a separate interview that Democrats will be lessopen to the level of spending cuts that Obama earlier offeredBoehner because the 2011 law that increased the debt ceilingincluded $900 billion in cuts. “It's going to be a new deal becausethings have changed and changed quite dramatically,” he said.

Concern that lawmakers will reach an impasse over the budget andpush the economy into recession drove the highest demand this yearat an auction of 30-year Treasury bonds yesterday. Yields on30-year bonds dropped eight basis points, or 0.08 percentage point,to 2.75 percent at 5 p.m. New York time.

If the president attempts to resurrect his talks with Boehnerincluding entitlement costs, he'll have to overcome resistance fromhis own caucus and Democratic interest groups.

On Nov. 7, Reid told reporters that Democrats were “not messingwith Social Security” as part of debt talks. He said he wouldoppose changes to the way benefit increases are calculated on anannual basis, known as chained CPI.

The alternative inflation index would be used to determineannual cost-of-living adjustments for millions of Americans as wellas the dollar limits of income tax brackets, which are adjustedannually for inflation.

The idea may anger Democrats and Republicans because it couldmean paring Social Security by $112 billion over 10 years, raisingtaxes by $72 billion and cutting pension and veterans' disabilitypayments by $24 billion, according to estimates last year by thenonpartisan Congressional Budget Office and the Joint Committee onTaxation.

The idea was discussed in debt talks led by Vice President JoeBiden and a bipartisan Senate group.

Conrad said he doesn't think the concept is tantamount to a cutin Social Security benefits.

“It's just a more accurate measure of inflation than the onescurrently being used,” he said. “Economists of every philosophicalstripe say if that's part of an overall package that's balanced,that's not an unreasonable thing to do.”

Democratic interest groups say they disagree.

The AFL-CIO announced yesterday that retirees and activists fromthe progressive and religious communities will host as many as 100events outside lawmakers' offices, health clinics and other sitesduring Congress's lame-duck session.

“Chained CPI is a cut to Social Security but just with anothername,” said Jeff Hauser, an AFL spokesman.

Bloomberg News

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