A Budget Deal Between Obama and Republicans?

Here is an optimistic scenario that could result in a serious long run budget agreement this year. First, a bipartisan group of senators crafts a long run budget-plan that slows the future growth of Medicare and Medicaid, puts Social Security on sound fiscal basis, simplifies the tax code to raise more revenue from broader base with lower rates, and caps discretionary spending (both defense and domestic).

This step doesn’t take long, because the bipartisan group is already working and has the Simpson-Bowles and Domenici-Rivlin plans to build on.

Next, the president and the House leadership join the negotiations. Political perceptions begin to shift.

After the sharp world market reaction to the brief battle over the debt ceiling increase, all participants are scared of not acting. Fear of taking the first step to slow entitlement growth or raise additional revenue is replaced by fear of being blamed for blowing up the deal and throwing the economy into a new tailspin.

The deal no one thought possible is signed in the Rose Garden in the October sunshine, markets react positively, business steps up hiring, and economic growth accelerates.