JONATHAN COHN JULY 21, 2011
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One more reason to think we're headed to some sort of economic apocalypse: Supply-siders like the Gang of Six proposal. Jonathan Chait explains the problem here:
The weird thing is that I like the Gang of Six plan, too. If The Journal editorial page (and [Larry] Kudlow) and I both like the same fiscal program, chances are one of us is confused. I suspect, unsurprisingly, that the confused party is the supply-siders. The only way to get tax rates down to the levels they're talking about while raising the kind of revenue the Gang of Six is talking about is to eliminate the capital gains tax preference. I have a hard time seeing supply-siders go for that.
Jon offers two theories. The first is that the supply siders are simply confused: They don't understand what's in the proposal. The second is that they're making a calculation: If a deal like this doesn't pass, the Bush tax cuts are likely to expire after 2012. Rates on the wealthy would revert to what they were during the Clinton era and there would be no accompanying tax simplification.
I have no idea which, if either, of these explanations is right. But the second theory is an interesting one and highlights a key dilemma liberals face when evaluating the Gang of Six proposal, or anything like it.
The biggest virtue of the Gang's plan is the substantial new revenue it promises: More than $1 trillion, above and beyond the revenue from expiration of the Bush tax cuts on upper incomes. In other words, if you assume that the Bush tax on upper incomes are going to expire, then the Gang of Six proposal would produce an additional $1 trillion in revenue towards deficit reduction. According to the Center on Budget and Policy Priorities, that's about $700 billion more than the Grand Bargain that President Obama has been proposing.
But it's still less money than expiration of all the Bush tax cuts would generate. (I don't have the exact apples-to-apples figures, because everybody is using different baselines, but budget experts confirm this.) So whether you prefer the Gang of Six proposal depends in part on what the likely alternative is.
I'd been hoping, as Jon has, that doing nothing would produce a political stalemate on taxes, leading to expiration of all the Bush tax cuts after 2012. But the Obama administration has signaled pretty clearly it wants to extend, permanently, the Bush tax cuts that affect middle incomes. If so, the Gang of Six deal is probably preferable, depending on details the Gang itself has yet to provide.
Of course, exactly how much the Gang of Six proposal even matters right now is another question entirely. At least for the immediate future, the odds still favor a narrower deal, along the lines of the McConnell-Reid proposal, that would lift the debt ceiling in exchange for modest spending cuts, mostly in discretionary spending. And there's still no telling whether something like McConnell-Reid can even get through the House, absent a full market panic that brings the Republican caucus back to reality. In other words, an economic disaster of biblical proportions remains very much a possibility.
5 comments
Chait's post assumes that the choice is between an economic disaster of not raising the debt limit vs some largelely Hooverian compromise that saves the economy. THAT's an incorrect analysis. The Hooverian compromise also produces an economic disaster in 6-12 months. The choice is: "which crisis do you want"? Most any compromise plan to increase the debt ceiling guarantees a long Great Recession at best, 2nd Great Depression a good possibility. And honestly blamable on BHO as much as the Repubs. A recession/depression in a liquidity trap is a big problem. A debt ceiling crisis is real, but less serious and more easily fixed. ...It is, at least in its origin, a politically manufactured crisis rather than a long-time--in-producing economic crisis---- eliminate the debt-ceiling law is one such quick-fix solution. In fact, even defaults by stong countries are not a disaster as great as a Great Recession/Depression. Google: Argentina.There are no quick-fix solutions to a Great Recession or Depression. Hence, from everything I'm seeing and hearing, y'all better pray the debt crisis negotiations fail to produce a "compromise solution" pushed by BHO. The cure is worse than the disease it purports to fix.
- drofnats1
July 21, 2011 at 11:52am
Here we go again. There's no way anyone is getting more stimulus until after democrats retake control of the federal government. So your complaints that Obama isn't doing so are less than persuasive but serve well to make you seem a fool.
- GSpinks
July 21, 2011 at 12:19pm
Higher tax rates guarantee more revenues and lower, or no, deficits. Lower tax rates and fewer tax expenditures don't. How do I know? It's called history.
- rayward
July 21, 2011 at 12:28pm
Democrats wont take control if the economy tanks in 2012. Or do you think that BHO is so loved by you and other Obamaphiles that is sufficient and he wins no matter what happens to the US economy (most important)-- and Iraq, and Afghanistan (of secondary importance to voters, but situations that could implode at any time) ?? And if he does win, and has incoherent Hooverian/Keynesian beliefs and policies that simply his being BHO all is economically put right? This appears to be a blue dog version of Reagan worship.
- drofnats1
July 21, 2011 at 12:31pm
What do you mean "if" the economy tanks? It's already tanked!
The economy needs stimulus to recover. The Republicans have stopped all chances of stimulus. The next logical step is to retake congress and eliminate the Republican roadblock. That requires playing politics and winning in 2012. Given Obama's approval rating and what happened in NY-26, he's setting himself up nicely and has given dem representatives a wedge to win even solid red districts next fall. But you and all the liberal kvetchers think he should be doubling down now and demanding every penny of stimulus he can now (even though there's pretty much no chance of any additional stimulus, as the republicans have made abundantly clear) because they'll all be swept out of office next fall. And you guys call me a fatalist, or whatever the hell? Really?!
Weren't you the guys who were lamenting that democrats talk too much policy and never enough politics? And now we've got someone who's playing politics and cleaning the floor with Republicans and he's the worst thing to happen since stale bread?
- GSpinks
July 22, 2011 at 11:25am