By Denny Gulino

WASHINGTON (MNI) – Circling each other in a preliminary budget bout
Tuesday, the Obama technocrat and the wiley Republican veteran of dozens
of budget battles scored few points on each other and yet seemed to
realize that this time they are locked in a battle to the end with no
escape.

The initial bout was staged at a Senate Finance Committee hearing
and although there were peripheral participants, Treasury Secretary Tim
Geithner knew the adversary with the weight advantage was ranking
Republican Sen. Orrin Hatch, three and a half decades in the Senate.

Before the Senate, Hatch worked his way through law school as a
janitor and construction worker and along the congressional spectrum,
has gravitas and probity to spare, easily distinguished from the Tea
Party zealots and their sympathizers Geithner faces later in the week.

Geithner goes on to the House Ways & Means Committee Wednesday, and
the Senate and House Budget Committees Thursday. These ritual meetings
always follow the presentation of the administration budget proposals
for the next fiscal year.

Hatch opened with an uppercut, pointing out President Barack
Obama’s budget last year did not get even one Senate Democratic vote.

Geithner stuck to his routine, spewing talking points that have
quickly numbed all listeners whether recited by Geithner, the president,
Gene Sperling, acting budget director Jeff Zients, the CEA’s Alan
Krueger, or Cecilia Munoz, domestic policy council wonk and others.

But he added something to his prepared text after listening to
Hatch’s opening statement in which he said, “We haven’t seen a budget
resolution from the Senate Budget Committee in years, despite it being
legally required,” and noting there is no prospect of any budget debate
on the Senate floor.

“Some people say this doesn’t matter. But it does matter,” Geithner
said. And in contrast to dead-on-arrival budgets of the past, there were
repeated signs that fiscal policy this year cannot just be dismissed.

This time around both sides for which Geithner and Hatch are
fighting know the budget battle is no Kabuki dance, where combat is
feigned and the actors know the outcome all along.

This time all the members of Congress know that while they cannot
afford to back down in an election year the reality is that in the end
— beginning at the end of this month until the end of the year — they
have to vote on several huge measures that will not wait. For once, a
failure to agree might just be worse in political terms than agreement.

By the end of this month Congress must have decided whether to
extend the payroll tax cut and whether to extend emergency unemployment
benefits. As a side dish, they have to placate the nation’s corps of
physicians, whose Medicare payments will be cut without congressional
action.

There are already some cracks in the steely facade both sides have
tried to maintain, with a surprise Republican proposal Monday night to
extend the payroll tax cut without a fight over how to pay for it. The
Democratic leadership was knocked off balance, immediately seeing the
proposal as a ploy to jeopardize the unemployment benefit extension.
Then Democratic leadership decided to embrace the change.

However the payroll tax and benefits extensions are small matters
compared to the fiscal Armageddon threatened for the end of the year
when Treasury’s borrowing authority will be running out, while the
triggers will be counting down toward — and even the word seems ragged
and threatening — sequestration.

So in the context of deadlines, Geithner and Hatch circled.

At one point Hatch repeated to Geithner what Federal Reserve Chair
Ben Bernanke had just testified, that if Congress cannot shed its
paralysis by the end of the year there will be a “very sharp change” in
the fiscal environment as government spending is chopped automatically
by what used to be unimaginable amounts. Did Geithner agree with
Bernanke that in that case “contraction will take place?”

“Absolutely,” Geithner replied to Hatch.

“Contraction” is the dreaded reverse into higher unemployment,
increased business failures and a grinding deceleration and possible
reverse that would impose itself on the plans of whoever is the elected
or re-elected president.

Because at the end of the year, with no congressional action,
defense spending will be cut by another half a trillion dollars, and
entitlement cuts and everything else the Super Committee failed to head
off will suddenly happen. “Sequestration” has become the common enemy of
both parties, as is the February 29 expiration of the payroll tax cut.
The enemy may be shared but the means to slay it are far out of reach.

Senate Finance Committee Chairman Max Baucus tried out one of the
areas that could be at least part of an political armistice:
infrastructure spending.

Both parties feel a hunger to rebuild bridges and highways.
Infrastructure spending adds jobs and it helps business. The few
remaining moderates dream of an infrastructure fueled agreement, coupled
with a commitment to future tax system reform, that could be a
foundation on which to build a fiscal future.

Hatch, in fact, smiling at Geithner, pulled his punches on the tax
reform front, telling Geithner, “I think we do need to modify our tax
system. I don’t think there’s any question about it.”

Geithner had conceded that all the tax revenue raising proposals in
the 2013 budget were, “Realistically,” in the context of massive tax
reform. An administration framework for corporate tax reform will be
offered, in fact, “next week,” Geithner said.

Reform proposals for individual federal taxes will be coming too,
but later.

Time after time, Geithner parried through the hearing with what the
Obama administration has been saying for a long time, that “We’re going
to have to raise some revenues from the tax system. We can’t do without
raising revenues.”

Without raising the $1.2 trillion in revenues specified by the
Obama budget, Geithner said there will be no other place to look for the
money than in Social Security and Medicare.

Returning again and again to the nub of the gulf between the
parties, Hatch simply stated, “I think we’re overtaxed now. I don’t want
to raise revenues. I’d rather have us make the tough decisions and see
what we can do to get things under control.”

At the end of the bout Tuesday, Hatch was the only committee member
left sitting, having been deserted by his colleagues who had other
things to do. He took the opportunity to back off the assault in
disarmingly generous terms.

He told Geithner, “I just want you to know you’ve inherited a very
difficult job in one of the most toughest times in history. I have
respect for how hard you work. I know you are trying to do the best you
can.

“I always respect people who work hard and you’re one of the
hardest workers I’ve seen,” Hatch said.

Geithner seemed surprised. “Invite me to come see you,” the
Treasury secretary said. “I will invite you to come see me,” responded
Hatch.

Hatch did slip in another couple of punches. “I just wish you could
convince this president of some of the things that you and I know he
ought to be convinced of.” And then, “I wish you would work a little
less hard on some of the crazy ideas this administration has.”

As Hatch and Geithner parted, they could agree that government
spending is at an unsustainable rate, that neither side wants to cut
entitlements, that automatic meat-axe budget cuts have to be prevented,
that time is running short — and that there are no answers yet to how
to go forward.

** Market News International Washington Bureau: 202-371-2121 **

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