JONATHAN COHN AUGUST 2, 2011
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Remember the agreement to extend the Bush tax cuts, which President Obama and congressional leaders enacted in December? The deal seemed like a complete capitulation with no upside, until we learned that the agreement extended unemployment insurance and reduced payroll taxes, providing a much-needed boost to the economy. Later, in April, an agreement to avert a government shutdown and cut government spending seemed just as dreadful. But then we learned the spending cuts were not quite as bad as we'd thought. In both cases, the deals were still terrible -- but maybe quite as terrible as we initially thought.*
I feel like a lot of us are going through the same thought process right now, as we digest and think through the implications of the new agreement to raise the debt ceiling. The headlines on Sunday and Monday, including in this space, focused on the imbalance between spending cuts (up to $2.4 trillion of them) and new revenue (none specified). And that's how it should be. This deal will do serious damage to programs that liberals champion -- and the people who depend upon them.
But it's becoming clear that administration got some key concessions in the end. I remain particularly pleased to see that the “trigger” – the threat of automatic spending cuts, in case Congress can’t follow through on a second round of deficit reduction – exempts programs for the poor, like Medicaid and food stamps, as well as the benefit structure of Medicare. And this agreement doesn’t entirely settle the big questions over taxes, spending, and the future fiscal priorities of government. Rather, it sets the stage for future debates, including what might become the Mother of all Policy Battles at the end of 2012.
At least, that’s the lesson I take from the latest statement by Robert Greenstein, president of the Center on Budget and Policy Priorities. Greenstein should be familiar to most of you by now: As I've said once or twice before, there's nobody I trust more on these issues. And his primary, overriding message remains dour. He documents the myriad ways this plan could lead to steep cuts that will hurt lower- and middle-income Americans: "The deal places the nation on a disturbing policy course." And he warns that this agreement creates two dangerous precedents: That increases in the debt ceiling are acceptable vehicles for debating fiscal policy and that increases should be matched, dollar for dollar, with reduced spending.
Says Greenstein:
Anticipating the policy battles to come, we should not lose sight of an alarming development. Those who have engaged in hostage-taking — threatening the economy and the full faith and credit of the U.S. Treasury to get their way — will conclude that their strategy worked. They will feel emboldened to pursue it again every time that we have to raise the debt limit in the future.
But Greenstein also highlights something that hadn’t occurred to me: The second round of deficit reduction is set to take effect in January of 2013. It’s entirely possible that some in Congress will want to undo whatever spending reductions are in store then, whether they come from Congress or the automatic cuts in the new law. And those cuts won’t be the only changes taking place in January 2013. That also happens to be when the Bush tax cuts are set to expire and when the debt ceiling will again require an increase. The way Greenstein sees it, the stage will be set for one, massive battle bringing all of these elements together – whether to follow through on the spending cuts and whether to let the Bush tax cuts lapse, all with another debt ceiling crisis looming.
Should progressives welcome such a fight? Should they fear it? I really have no idea. The permutations are too many, the variables too unknown. But if things really do play out that way, I imagine these questions will dominate the presidential election, presenting Americans with two stark choices for the size and priorities of government. And maybe that’s the way it should be.
*How overtired am I right now? I wrote that the Bush tax cuts were extended in april. Of course, that happened in December. Thanks to reader "blackton" for catching this egregious error.
20 comments
I will repeat my comment to Chait's latest: The deficit and the debt is a side show, the underlying issue being fought over is progressive taxation, or, more accurately, the end to progressive taxation. As we know from experience, the Republicans don't really care about deficits, but they do care about the level of taxation, or the rate of taxation, for those at the top. It's their goal to replace the current progressive income tax with a flat tax, so everyone, lower income, middle income, and upper income, pays tax at the same rate, which they believe is both fair and will discourage the adoption and growth of government programs - shifting the overall tax burden down will make those at the lower and middle income levels much less enthusiastic about government spending. This is the great debate currently taking place, though one wouldn't know it. Indeed, Bowles-Simpson, the Gang of Six proposal, and other proposals for tax "reform" take us in the direction of a flat tax. Those fortunate to be at the top don't rely on, don't need, social security and Medicare, and they naturally don't want to bear a disproportionate share of the burden to pay for them as the boomers age. For the boomers, although they have been "pre-paying" much of the cost of those benefits during the past 25 plus years, as payroll tax collections have exceeded benefits during this period by about $2.7 trillion, the excess collections (the "trust fund") have already been spent on other government functions, including wars and tax cuts for the wealthy, so the issue isn't just progressive taxation vs. a flat tax for the future, but also for the $2.7 trillion that must be collected again to pay benefits to the boomers that they have already "paid for" once. If I'm right, then the Republicans will accept a flat tax system as their grand bargain, and, once adopted, the deficit hawks on the right will disappear into the night.
- rayward
August 2, 2011 at 8:32am
"It extended unemployment insurance and reduced payroll taxes, providing a much-needed boost to the economy" This is a topic I am interested in because Republicans have claimed that the payroll tax cut did not help. If tax cuts at the bottom don't help; and if the Bush Tax Cuts didn't help for ten years; and if the Clinton Tax Increases didn't hurt; then the effect of tax cuts on the economy might be overrated. Although I believe that tax rates don't drive, but they do steer. The Bush lower capital gains and dividend rate sucked investment capital away from small business and into the stock market which might explain poor job performance for the past 10 years.
- Nusholtz
August 2, 2011 at 8:44am
" I imagine these questions will dominate the presidential election, presenting Americans with two stark choices for the size and priorities of government." I wonder how many now believe that Barack Obama is the best person to represent the liberal side in that debate.
- hsny
August 2, 2011 at 8:48am
Hopefully, hopefully, this will be the biggest issue (besides the economy) of the 2012 election. And hopefully we'll have a few Democrats with balls to say "Look what the Tea-Party Republicans have done to Congress! To our economy! In January 2013, whatever Congress you elect will have the power of life and death over Social Security, the Debt-Limit, and the Bush Tax-cuts. In this election you have a clear choice -- dogma driven demagogues determined to throw Grandma on the street, or Democrats. Vote for the party of responsibility! Vote Democrat! It's the only way to be sure."
- AllanL5
August 2, 2011 at 8:57am
My big fear of course is that the Republican will find some way to 'spin' this so that THEY will claim to be responsible, THEY will claim to preserve Social Security and Medicare/Medicaid. Then after the election pursue what they did in 2010 -- cut, cap, and balance everything into privatization, effectively destroying it.
- AllanL5
August 2, 2011 at 8:59am
jeez Cohn, get the basic timeline right. It was in December that the Bush rates were extended. Averting the shutdown in April resulted in about 300 million in cuts. As far as 2013 goes, if Obama wins re-election, Republicans are going to be shellshocked since they will also likely lose a number of house seats as well. I would love for them to state that their losing is a mandate to push for more cuts. If Obama loses, then I see nothing more than token cuts because they are not going to push Obama to let the country default on the eve of a new Republicans administration. Either case the debt ceiling will not be such a great concern (as much as a new Republican administration which will be nuts)
- blackton
August 2, 2011 at 10:45am
- Some people are all over the place. It's awful, it's not so bad, it's too complicated to judge (we'll know more next year). And if not next year, certainly by January of 2013. It's done and people who don't know what it is claim they could have done better...
- michaelg
August 2, 2011 at 11:33am
Looks more like a winner-take-all election has been set up by all these timings. The campaign will allow each side to make their case within the context of where the economy is at that time. There will be plenty of fodder for commercials for both sides coming out of this debacle. There will be all the illustrations of what is broken and what works. In the end I expect the Democrats have a better chance of being seen as being in line with the population but if they can't make their case, given all the ammunition against the tea perty and the cash they will have to campaign with, maybe they don't deserve to win. I suspect we will not come out of 2012 with divided government either way.
- Zachsteph
August 2, 2011 at 11:40am
The worst thing about the capitulation is that it has established a precedent for using the debt ceiling as a way to impose legislation by extortion. And this is a weapon that will only be used by the party that wants to attack the Federal government, and it will only be used against Democratic administrations and initiatives. It's a weapon that can be used by a filibustering minority in the Senate, and it doesn't necessarily have to be used for fiscal legislation--it can be used, for example, to secure a weakening or elimination of environmental or financial regulation. Now there's no way to get rid of it, either, short of a Democratic control of the presidency and both houses of Congress, with a filibuster-proof supermajority in the Senate. And that's not going to happen soon. The debt ceiling extortion ploy is as secure as if it were enacted into the Constitution.
- BillW
August 2, 2011 at 12:35pm
Count me among those who's "all over the place" at this point. Much seems to depend on how well BO and the Dems can play their cards going forward. (And I tend to think they have a winning hand, if well-played, as Zachstep suggests, going into 2012.) Still, have to be a little nervous about how much steeley resolve vs. wishing for peaceful reconciliation resides in the heart of BO. I really want to think he is a crafty, devious, cold-blooded, sumbich in his core, and not a soft-headed self-imploder, as many suggest. I find the notion that he is a more ruthless type of character - more like Lincoln, his professed model, really was, as opposed to the plaster saint of popular imagination - reassuring. God, I hope it is so.
- Haole45
August 2, 2011 at 12:47pm
The situation is hopeless for Keynesian economics and the country unless the current leaders are replaced--- including BHO. You're delusional if you think otherwise. Economics has been a science for over 60 years and only Keynesian theories and policies fit the available data. The only way for such a political shift to occur is if Progressive politicians advocating and supporting Keynesian policies (which already have majority voter support) actively come forward and challenge Repubs, Blue Dog Dem-types and Repubs.
- drofnats1
August 2, 2011 at 12:49pm
Who would you replace Obama with drofnats?
- Pnaut
August 2, 2011 at 12:56pm
This debt ceiling crisis came to us through downright hatred of the president. It will just get worse. As someone already stated, the president has ventured down a slippery slope by giving in to the lunatic fringe that sees taxation and spending cuts to the defense as tantamount to burning a flag draped Jesus on Christmas, dressed in Muslim garb. I almost hope that the end of the world will come in 2012 so this political garbage will come to an end.
- PlanetScot
August 2, 2011 at 1:25pm
Good question Pnaut.
- ballston
August 2, 2011 at 4:21pm
Pnaut, Clinton was his first choice, iirc.
- GSpinks
August 2, 2011 at 5:31pm
On top of what PlanetScot says, I just turned on CNN for about 5 seconds and some Republican is actually claiming that Obama has DECLARED WAR on the rich. That's right, he has the poor wealthy people in his gunsights! He is ruining the economy because the rich don't know what their tax rates are going to be! OMG. I do not believe this s***.
- Sophia
August 2, 2011 at 5:58pm
"he has the poor wealthy people in his gunsights! He is ruining the economy because the rich don't know what their tax rates are going to be!" Sounds fair since the rest of us don't know if we'll be employed this time next year and have money to pay any taxes.
- tmmats
August 2, 2011 at 9:12pm
Rayward writes: " It's their goal to replace the current progressive income tax with a flat tax, so everyone, lower income, middle income, and upper income, pays tax at the same rate, which they believe is both fair and will discourage the adoption and growth of government programs - shifting the overall tax burden down will make those at the lower and middle income levels much less enthusiastic about government spending. " All flat tax plans have an initial exemption and/or rebate. The FairTax plan, for example, has an effective tax rate of 0% on $29K earnings, 11.5% on $58K earnings, 17.2% on $116K earning, end up around 22.3% on $930K earning. It is quite progressive. Today, someone earning $58K is paying an effective rate of 14.2%, and someone earning $161K is is paying 22.5%. More importantly, the FairTax will capture huge revenues from wealthy folks that don't work and that spend. Our tax system today captures nothing from this group. And remember, progressivity doesn't have to just come from the revenue side. It can also come from the benefits side. Today in the US a person in the top 20% receives about $0.41 of benefit from each dollar of taxes, while a person in the bottom 20% receives about $8.21 of benefit from each dollar of taxes. The massive ratio is hugely progressive.
- seattleeng
August 3, 2011 at 11:14am
drofnats writes: " Economics has been a science for over 60 years and only Keynesian theories and policies fit the available data." You are joking, right? Can you cite a study reviewing this?
- seattleeng
August 3, 2011 at 11:18am
2012 will be a rage-induced anti-incumbent wave. assuming anyone has the stomach to run for election. maybe the Mayan prophecy for 2012 will solve America's problem and flood the entire country into oblivion- was it not Africa that survived that film-version apocalypse? military coup is my preference - put a Marine sniper in charge. seattleng: thanks, not that anyone pays attention to reality :)
- K2K
August 4, 2011 at 7:59am