Posts Tagged ‘Tax Compromise’

Obama Makes Lemonade out of Lemons

Friday, December 17th, 2010

I have to say that I have been surprised at the liberal fulmination over the two year extension of Bush tax cuts. On one level, I get it: it’s frustrating as hell that the Republicans acted as irresponsibly as they did over the past two years and have been rewarded with a control of the House, 6 new seats in the Senate and the policy that they care about the most: tax cuts for the rich (which are also the least economically stimulative of the policies that have recently been considered). Still, it’s hard to say that you couldn’t see this coming and I would argue that the total package is not a bad deal either politically for Obama or economically for the country.

Regarding the extension of tax cuts for the rich, the die was probably cast when the Democrats punted on taxes in the run up to the election. They didn’t have the votes in the Senate for an extension of tax cuts for just the middle class (due to Republican filibuster threats and Democrats that vote like Republicans) and didn’t want to put a handful of their own members in a situation of filibustering the Democrats’ tax bill just before a tough election. The House, in turn, refused to take another tough vote if the Senate couldn’t pass the bill.

The Democrats problem here was the same one that they had for the past two years: they were afraid to stand up to the Republicans and provoke a fight over taxes. What they should have done is made the Republicans (and Lieberman, Ben Nelson, Blanch Lincoln, etc.) filibuster….and I don’t mean have a cloture vote, say that they couldn’t get 60 votes and then go home early for the weekend. I mean make them stand up on the Senate floor and talk and talk and talk about why they were filibustering tax cuts for 98% of the people so that they could preserve taxes for the top 2%.  They may not have gotten their bill passed, but it would have been a clear contrast for the American people and they could have prepared the public for the fight we are having now and put pressure on Republicans for a better deal. Senate Democrats have complained that Obama is not standing up enough to the Republicans, but they are the ones responsible for not dealing with this issue until the last two weeks of this session and giving the Republicans maximum leverage.

And while the deal cut with Republicans is far from an optimal deal, there are a number of ways that this deal works politically as well as economically for the President and the country as a whole. First, most economists agree that the economy needs additional stimulus and that the worst thing you can do during a deep recession is to cut government spending and raise taxes. Obama clearly believes this as well, since he has argued for it both domestically and internationally again and again, even when he can’t get agreement from allies.

A comparison of the framework agreement between the Obama administration and congressional leaders and another option

Just after the election, I commented on Peter Beinart’s lamenting ”the Death of Keynesianism” as a result of the Republican victory. In the aftermath of the election it seemed that the dysfunction in Washington left Ben Bernake’s Fed holding the only weapon in the fight to revive our economy. But the president is showing that the death of Keynesianism has been greatly exaggerated, at least for the short term. While the policies agreed to in the compromise are far from the most effective stimulative policies, they will provide some lift to the economy that would have been missing had the Republicans governed like they campaigned.

As I’ve said before, I’m not completely opposed to a 2 year extension of the Bush tax cuts for the top 2%, although I would rather see those provisions expire and the money be redirected to tax cuts that actually stimulate more (like a payroll tax cut that benefits employers as well as employees (instead of just employees)). It also would have been nice to get some construction projects to deal with our crumbling national infrastructure, but perhaps this was a bridge too far for the Republicans. What we will get is a  package of tax cuts that, depending on how you break them out, amount to close to a stimulus of $900 billion (or $600 billion over and above what had previously been supported by both parties).

In addition to the economic benefits of the tax cut deal, Obama may reap some political rewards as well. As Chuck Todd has pointed out, part of Obama’s problem over the past two years has been that he has acted more like a Prime Minister trying to shepherd his agenda through Congress than a President using the bully pulpit to call legislators out in order to build support for his agenda (as he was able to do so effectively in the 2008 campaign). And while the strong reaction from the left has been surprising, recent opinion polls have showed broad support for the deal. In addition, economists have projected that the tax cuts will increase the  GDP by as much as 1%, create an additional 3 million jobs and decrease the unemployment rate by close to 1.5%.

As an added bonus, the debate has shown just how hypocritical the Republican party’s leaders really are. For the past two years, they consistently complained about the budget deficits that were run in order to prevent an even larger economic collapse than we actually had. They pretended that they couldn’t distinguish between short term deficits to prop up the economy, and long term structural deficits that were unsustainable. As my conservative uncle liked to say, the Tea Party led Republicans were going to bring “fiscal responsibility” back to Washington. And what did they do within a month of their election? Add another $900 billion to the deficit before the new Congress even got there. Like I said previously, I understand that you need to run deficits in times of economic downturn. But I didn’t spend the last two years running a constant campaign against those deficits. 

Some have argued that the Republicans may be successful at extending the Bush tax cuts for the top earners in 2012. But this also sets up a fight that Obama can use to his advantage. If the Republican House brings up the extention in 2012, it should die a quiet death in the Senate. Plus, the country will be focused on deficit reduction by then, and Mitt Romney can explain to the country in the presidential debates why he wants to add another $700 billion to the debt and the onus will be on him to propose cuts to programs in order to pay for them.

The deal is far from perfect. But, all in all, it’s a much better deal than I thought Obama could get just a few months ago.

But don’t take my word for it. Take Charles Krauthammer’s.