PLANK DECEMBER 28, 2012
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Setting aside the obvious consequences for the economy, what exactly is at stake in the fiscal cliff negotiations?
To hear conservatives tell it, liberals aren’t just preoccupied with fairness and balance, their recent buzzwords of choice. They’re engaged in a brass tacks fight over the size of the welfare state, which can’t persist unless they scare up a lot more cash. And if, as conservative writers like Ross Douthat and Yuval Levin have observed, liberals can’t substantially raise taxes now -- when they have as liberal a president as they’re going to get in a while, and when taxes are slated to rise by trillions of dollars automatically -- it’s highly unlikely they’ll ever be able to fund the social benefits they’ve created.
“[T]he White House’s quest to extract as much tax revenue as possible from the current negotiations looks … like the sine qua non of [its] agenda as a whole,” Douthat wrote. “[W]ithout more tax revenue nothing else about the Obama program makes much sense.” Levin argued that more revenue now is the only hope liberals have “to save the welfare state from itself.”
Seen in this light, the conservative goal of minimizing the revenue these negotiations generate makes its own Machiavellian sense. Without sufficient revenue, the welfare state becomes unsustainable—like a wild beast starving, you might say. Democrats will have no choice but to accept Republican efforts to reform it, probably along the lines Paul Ryan proposes. And the less Obama is able to gin up in the way of revenue this time around, the sooner that reformation will happen.
On its face, the logic is pretty compelling. If you just look at the lengths to which Obama went to offset the costs of his healthcare plan, it suggests even Democrats realize the days of the blank-check entitlement program are probably over. And yet I still think the Douthat-Levin thesis is off-base.
For one thing, it doesn’t exactly comport with the behavior of the White House. Obama’s opening bid in the current talks was $1.6 trillion in revenue, or about $800 billion more than what he figured he could get if there were no deal, and about one-third of the revenue he would raise if he simply let all the tax cuts expire on January 1. Since then, Obama has come down pretty quickly—first to $1.4 trillion, then to $1.2 trillion. Now you might argue, as I have, that this is partly a function of Obama being an exquisitely bad negotiator. But it’s not just Obama. Had Republicans signed on, the president would almost certainly have been able to sell the $1.2 trillion package to his allies on the left, which would seem to cast doubt on the revenue imperative Douthat and Levin posit. If it actually existed, then surely these allies would be hypersensitive to it.
The reason they’re not is because the fiscal long-game mostly favors liberals. To see this, let’s fast forward a decade or two and imagine a similar negotiation. I suspect that, if anything, Medicare and Social Security will be even more popular than they are today given the aging of the population, making them even harder to cut. It’s possible that raising taxes on the affluent will be less popular—some 60 percent supported Obama’s desire to do that in last month’s exit polls—but I doubt it. Historically, Americans have been sympathetic to the idea. And while it’s true that, as conservatives point out, you can’t fund the entire welfare state by raising taxes on the wealthy, it’s not the only source of revenue that’s likely to exist. If nothing else, I’d guess a future Democratic president could raise taxes on income well below $250,000—probably down to $100,000—without incurring major blowback. And, as Barney Frank has pointed out, scaling back our overseas military commitments is also pretty popular—both in general and in specific countries—especially when money is tight and the country in question poses no direct threat. Unless there’s some geopolitical development in the next few decades that dramatically changes public opinion—a cold war with China, say—there’s likely to be hundreds of billions of dollars in politically gettable savings there, too.
All of which sums to the following: Even absent new revenue, rising spending on Medicare and Social Security will be the political path of least resistance in the coming decades. And if the government is determined to bring its books more into balance, it turns out generating new revenue, or freeing up money from elsewhere, won’t be that hard. (Or at least raising enough money to muddle through for a long time even if we can’t balance the budget entirely.) While it may not be economically desirable to let the welfare state hoover up a larger and larger portion of government spending and GDP -- and while polls show the public opposes this in the abstract -- there will be no political imperative for Democrats to stop it. When actually forced to choose, no one wants their Medicare cut.
Or put differently: If Obama isn’t able to nail down enough revenue to make a big down payment on the welfare state this time out, it doesn’t mean, as Douthat and Levin would have it, that no Democrat will ever be able to. It just means we’re not yet being forced to choose between more revenue and Medicare, at least not beyond the margins. (Though one can never discount the possibility that Obama will agree to Medicare cuts that are politically unnecessary—which, you know, he shouldn’t.)
Having said that, I do think there will eventually be some effort to rein in Medicare spending, which is a far bigger driver of our long-term deficits than Social Security. Even a relative liberal like Obama has conceded that it’s going to cost future generations too much money. But I doubt that will involve a negotiation between Democrats and conservative Republicans like Ryan, to say nothing of the outright adoption of a Ryan-esque plan that Levin envisions. It strikes me as much more likely to emerge from a negotiation among Democrats. The Republicans will have very little leverage because Democrats can credibly attack them for wanting to slash Medicare, but the reciprocal attack doesn’t work—no one outside the most conservative enclaves is going to lose an election because they refuse to cut the program. (That explains why, even though they claim to want Medicare cuts, Republicans chronically resist proposing anything remotely specific.) And a negotiation among Democrats is probably going to focus more on lowering health care costs overall than Medicare benefit cuts per se.
So yes, by all means Mr. President, please bargain hard for as much revenue as you can get. The Bush tax cuts were terrible policy that saddled us with trillions in debt for little discernible economic payoff, and they exacerbated income inequality to boot. But should Obama fall short of the revenue liberals would like to see him procure, let’s not presume the entire welfare state hangs in the balance.
10 comments
"...the fiscal long-game mostly favors liberals. To see this, let’s fast forward a decade or two and imagine a similar negotiation." No, let's not. Fast forwarding 20 years might be an enjoyable exercise, but it tells us nothing about how the many, many factors influencing public policy will play out. From China to Iran to climate change to a crippling financial crisis to, most of all, factors we can't even predict, we don't have a clue about the fate of the fiscal long game.
- Thunderroad
December 28, 2012 at 12:50am
This "welfare state" of which you speak is a bogey man that was executed in 1994 when CLINTON signed welfare reform. The Republicans continue to trot it out because people like you keep apologizing for all the give-aways and promising to not let it happen again, which gives them an immediate advantage in political points on any related topic. Quit legitimizing their arguments; it's a straw man to draw fire away from their actual agenda, which is to bilk Americans out of every dollar they can and de-centralize any authority they cannot win easily via elections.
- GSpinks
December 28, 2012 at 1:15am
Amen. We don't really have a "welfare state." And our safety nets are poor compared to, say, Germany's. The more this "fiscal cliff" nonsense goes on the more apparent it becomes that the GOP is quite serious about impoverishing Americans and destabilizing the system that has helped us build a middle class. Why?
- Sophia
December 28, 2012 at 1:49am
Throughout history the sovereign power has tried to spend more, tax more and borrow more. This always works out great in the long run, doesn't it?
- homeros
December 28, 2012 at 2:20am
Today's debate should be focused on tax rates, not revenues, for future increases in income tax revenues are far simpler with higher tax rates enacted today. As I've pointed out many times, raising tax rates requires special dispensation from God (whereas tax expenditures grow like kudzu). Once we lock in relatively low rates (low historically), the so-called Clinton-era rates, coupled with only a few tax brackets, raising additional income tax revenues in the future may require a personal appearance by God. What I fear, indeed, what I expect, is another whopping increase in the regressive payroll tax, both because the Republicans are in love with the highly regressive tax (it's the "flat tax" they have always wanted) and because of its fictional tie to entitlement funding; and the tie is fictional, the $2.7 trillion now owed to the social security "trust fund" being absolute proof. Obama has signaled that he would settle for an additional $1.2 trillion in tax revenues. That's not even half of the amount owed to the "trust fund"! Where, oh where, will we find another $1.5 trillion to restock the "trust fund" after the current battle of the ages to raise a paltry $1.2 trillion? Scheiber's answer, according to this article, is that Americans, if given a choice between funding entitlements and funding military bases, will choose funding the entitlements. But Americans don't have that choice, not now and not likely in the future, not unless we amend the Constitution first, a highly unlikely event. No, the choice will be between inadequate funding of entitlements and another whopping increase in the regressive payroll tax (or some other regressive tax such as a sales tax). And when the time comes to make that choice, progressives will look back to 2012-13, and wonder how and why Obama and the Democrats would settle for so little when they supposedly had all the leverage.
- rayward
December 28, 2012 at 8:02am
In other words, Baby Boomers will enjoy lavish retirement benefits while also avoiding paying sufficient in taxes during their prime earning years.
- subterra
December 28, 2012 at 10:27am
Krugman has a blog post this morning on the implications of increasing inequality (i.e., a greater share of GDP going to capital) and dependence on the payroll tax to fund entitlements. Also, for those not acquainted with the whopping increase in payroll taxes adopted in the 1980s, the effect on baby boomers (including this commenter) is that we both funded entitlements for the greatest generation and pre-funded most of our own entitlements.
- rayward
December 28, 2012 at 11:05am
Considerably less clever the second time homeros, especially when you don't bother to address rebuttals on the previous thread.
- Nari224
December 28, 2012 at 12:01pm
subterra I don't know what generation you are from but baby boomers paid bigtime taxes, higher rates than the rich (just ask Buffett) and also, not all baby boomers are well off. Most of us aren't, just check the Gini curve, and we've also borne the brunt of serial recessions and rising costs and have had to re-educate ourselves several times over to cope with the technology boom which has also cost many good jobs, plus the weakening of union labor and the export and outsourcing of our jobs. Now it's time for us to retire and we're under attack - why? These intergenerational wars are just another form of right wing, top down class warfare. They do not help matters (understatement). As it is, many people around, say, age 60 have ancient, sick or otherwise impaired parents who need help and also kids, ditto. In any case we're facing a scary future and the less well-off won't be able to afford nice long lives due to spiraling medical costs if nothing else, but also there's continuous upward pressure on basic utilities, transportation, communication and just keeping a roof over the head at a time when the body is weakening so quitcherbitchin. As for the regressive taxes: ditto. These further impoverish poor and so-called middle class people and make the richer relatively richer and vastly more powerful. It's pretty obvious, when you add all this together, that some of us don't believe in the concept of democracy. They still believe that "demos" = the rich and powerful whereas "the masses" must be kept under control lest the mighty lose their grip. When Obama got elected that added racial fear to the mix, social mores are another wedge issue. "God" forbid that women and gay people and immigrants and non "white", non "Christians" have equal rights, that would be against The Natural Order of Things. Eventually less well-to-do people who've been voting Republican will see the light (I hope) and vote against this transparent attempt to disenfranchise American voters.
- Sophia
December 28, 2012 at 1:54pm
I enjoyed this thoughtful article. Here is what I think happened throughout history. Government realizes, as Britain did in 1767 and King John did in 1215, that it must make examples of people who do not pay their taxes. The reactions were Magna Carta and the American Revolution. Simply put, "broadening the base" and lowering the top rate, as advocated by Republicans, will make a larger class of people who are unable to pay. Flatter rates means less revenue from people who have more and it means more revenue from people who have less. Progressive rates are easiest on the economy and require the least government power to collect in criminal prosecutions, levies and seizures.
- Nusholtz
December 28, 2012 at 4:36pm