Friday, December 10, 2010

The Obama/GOP Deal

-- Posted by Neil H. Buchanan

This week's news has been dominated by discussion of the deal between President Obama and Congressional Republican leaders on taxes. In the current state of affairs (as of roughly 10pm last night, which is the last time I checked), House Democrats have announced near-unanimous agreement that they will not vote for the current version of the deal, and still-Speaker Nancy Pelosi will not bring such a bill to the floor. No one is saying what will have to change before the House Democrats go along.

Herewith, a few strands of thought on matters economic and political:

-- One way to view the deal is to simply add up the numbers and compare which party's priorities received more money. The (generally excellent) economics writer for the New York Times, David Leonhardt, summarized it this way: "Of its estimated $900 billion-plus cost over two years, roughly $120 billion covers the high-end tax cuts and the estate tax cut, $450 billion covers Mr. Obama’s wish list and $360 billion covers the tax cut extensions both parties favored." Thus, one could argue that Republicans "liked" only $480 billion of the $900 billion price tag, while Democrats should "like" $810 billion. Democrats win, right?!

Two problems with that framing immediately jump to mind. First, this assumes that the alternative was for the Democrats to get none of the $810 billion that they wanted, and Republicans would have gotten none of their wish list, either. This is clearly false. No one can credibly argue that, for example, the extension of unemployment benefits was only possible in this deal (and no other). It is true that the ultimate deal could have been worse, especially if the issue was delayed into the next Congress. With unemployment now at 9.8%, however, it is not at all difficult to imagine an alternative reality in which benefits would have been extended anyway. (And even under the deal as it stands, the long-term unemployed are still cut off.) Most of the things that Democrats are supposed to like (and certainly the things that both parties like) could have been achieved in any event. As others have pointed out, for example, Obama incorrectly asserted that some of the middle-class-oriented tax cuts were unpopular with Republicans; so his claim that these were concessions by Republicans was simply wrong.

The number of dollars spent on Demcrats' priorities in the alternative reality might (or might not) have been lower than $810 billion, but they were definitely well above zero.

Second, the two-year numbers are only part of the likely consequences of this deal. Obama and his people assert that they'll really, really take this fight to the Republicans in the next presidential election, guaranteeing that the tax cuts for the high end taxpayers -- both the lower rates for the $250k+ group, and the (absurd) watering down of the estate tax from even its degraded state in 2009 -- will definitely end in two years. Definitely.

The recent election suggests otherwise. In an election season in which the Democrats were casting about for winning issues, and even though they held a very popular position on tax progressivity, they chose not to even allow a vote on the extension of the Bush tax cuts. Their story was that they did not want to risk being viewed as "tax hikers." It is difficult -- not impossible, but quite difficult -- to see how this political dynamic will be different in 2012.

If it turns out that this is all just prelude to permanent extension of the regressive Bush tax laws, with the rest of the elements of the deal being temporary (appropriately, given that they are policies that liberals view as situation-specific), then the computation of who won and who lost changes pretty radically.

-- Some have argued that the deal is essentially a "mini-stimulus" plan. There is some truth to this, in the simple sense that some of the money is likely to result in increased spending. Paul Krugman estimated (here, under "The Deal" on December 7) that the best one could hope from this plan is for the unemployment rate to fall by something like 3/4 of a point in the next two years, with the effect weakening in the second year. Of course, no one should underestimate the importance of any decrease in unemployment. However, the major problem with the original stimulus plan was that it was too "mini"; so heralding the Obama plan as being stimulative merely sets up the future narrative that stimulus didn't work again. The misunderstood condition regarding fiscal stimulus is that it needs to be large enough to kick-start the economy, not just give it a weak push.

Also remember that the estimated decline in unemployment is measured against a completely impossible counter-reality: no extension of any of the Bush tax cuts, and no payroll tax holidays, or other extensions of unemployment benefits, etc. This is a lesson from False Comparison 101.

-- On the politics, Obama's supporters claim that the Democrats in Congress are now taking a position that is untenable. There is no way that the Republicans are going to give the Democrats what they really want -- even with public opinion polls so strongly in the Democrats' favor on these issues -- both because the year is even closer to being over and because the Republicans will not now move away from a position that they have negotiated with the leader of the Democratic Party. All true, probably. This is, however, a variation on the venerable "I killed my parents, so please have mercy on a poor orphan" defense. Obama's actions are what made it impossible to take a harder line, so he really cannot take credit for getting the best deal possible under the circumstances. He changed the circumstances, after all, in a way that undermined the position that he claims actually to support. Of course, that bell cannot be un-rung; but arguing that the current landscape precludes some outcomes that might have otherwise been possible is not the same thing as saying that there is now no better outcome possible.

-- Regular readers of this blog know that I was an early deserter from the Obama bandwagon. The hope during the 2008 campaign was that Obama's short record and vagueness on policies would turn out better than Hillary Clinton's guaranteed center-right policies. Once Obama's economic team was announced (to say nothing of his choice of Rahm Emanuel as Chief of Staff), however, it was rather starkly clear that we were going to get the same economic mismanagement that we would have seen with Clinton. What is now even more obvious is that Obama has become Clintonian in his political tendencies as well as in his policies.

The big spin at this point, after all, is that the House Democrats' opposition to Obama will simply make Obama look good to independent voters. In other words, we are now seeing Triangulation: The Sequel. I am not aware of any indications that this was actually Obama's plan in cutting this deal -- he seems to be genuinely surprised by the ferocity of the reaction by Democrats -- but he now seems more than happy to run against his own supporters by painting them as crazy "purists" who cannot be trusted to govern. This strategy won Bill Clinton a second term; and it might do the same for Obama (although I doubt it). What seems certain is that a strategy in which a Democrat tells people not to trust Democrats is not a winner for Democrats.

It is also worth remembering that Clinton's most energetic legislative battle was in favor of NAFTA, over the opposition of most of his party. The White House staff "went to the mattresses" for that one, setting up a "war room" and publicly attacking fellow Democrats who disagreed with Clinton on that issue. We have been waiting for Obama to become energetic. Like Clinton, he suddenly finds his inner caveman when he is attacking his supporters from their right.

-- Many commentators have noted Obama's nastiness and condescension in his public comments this week. The self-pitying attitude is rather difficult to stomach, of course. In addition, however, it is notable just how far off his game he has become in terms of actually making arguments. For example, in his press conference on Tuesday, Obama made the obvious comparison to the health care debate, noting how disappointed many Democrats were when the "public option" was dropped. He then mocked those Democrats for failing to see that the public option, which he said would only help 3 million people, was a minor loss in the context of a bill that would help more than ten times as many people. This is like saying that a town's fire department is no big deal, because how many houses have caught fire lately, really? If Obama really thinks that the only effect of a public insurance option would have been on the people who would have been its direct customers, then he is much less intelligent than we thought. Of course, the more likely explanation is that he knows better, but he is becoming sloppy -- or worse -- in the heat of this battle.

3 comments:

Paul Scott said...

Politically I think this deal was a disaster for Democrats. Before the deal, democrats could continue to support and even pass in the House legislation that would have had all of the needed components: tax cuts for "middle class" (to an extent I find this laughable that the middle class is "those making $250,000/year or less", I would have set that bar much lower) and the unemployment benefits. They could have then presented those bills to the Senate for Republicans alone to prevent passage. Including, as was done with the immigration bill, actually making Senate Republicans vote to prevent its even being voted on.

That scenario strikes me as a complete political loser for Republicans. Thanks to Obama, that is no longer really possible. Unless the democrats now capitulate to the Obama/Republican plan, their will be political ammunition on both sides that it was the other party who prevented millions of people from getting the help they really needed.

With that said, I do wonder if a regressive tax policy (which we have with or without the continued Bush Tax cuts and will always have so long as our focus on taxation remains primarily on income) is really that big of a price to pay for getting other progressive policies through. Even if "permanent," so long as passing the Bush Tax Cuts happens every two years on condition as a compromise for some other policy (this year it is primarily the unemployment insurance extension, but maybe in 2012 it is some other aspect of health care, etc.) then the only thing I see really going poorly is that we continue to increase of debt because we don't tax enough, then maybe this is not such a big deal.

I'd like to see how far this can go. Maybe Obama can propose a single payer health care program in exchange for eliminating the capital gains tax. Maybe we can get a few hundred billion in infrastructure spending if we agree to a two year moratorium on tax of all income in excess of $250,000. If we were allowed to spend on thing that are really desperately needed, I'd exchange that for tax breaks for the rich, or even let them pay no taxes at all.

Such deals would be amusing, if nothing else, so that we could see where these "deficit hawks" really stand.

egarber said...

A couple of points:

1. Given the state of the economy, is it not better to finalize *this* package now, rather than extend the battle into next year? Waiting it out might generate a more attractive solution, but it could be self-defeating or worse, in that the uncertainty about tax rates would likely spook middle / lower class voters to an extreme.

With the recovery in such a fragile state, further consumer cut-backs could be devastating. Here, I disagree with Krugman, who wrote the other day that allowing all cuts to expire wouldn’t cause much harm. Hell, I think the very idea that they might expire for middle / lower earners is harmful.

2. I think Obama might be planning to pivot from this to tax reform generally. By diffusing the immediate issue, he could beat Republicans to that larger debate – applying pressure to ensure significant progressivity, even as popular deductions are eliminated. We can call that “triangulation” if we want, but it might prove very effective politically and for the country.

egarber said...

one further point.

There's some confusion on this, but it's likely that extending the problem into next year will immediately reduce paychecks, because withholding would be adjusted upward. So it's not simply the idea of increased rates that would spook middle-income earners; they would literally have less to spend starting in January or February.