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Is This Really a Raw Deal for Democrats?

August 1st, 2011 . by economistmom

Bill Gale of the Brookings Institution provides an excellent summary of the good and the bad in the debt limit deal.  The major “good news” is that if this breaks the impasse on passing an increase in the debt limit, the U.S. will avoid immediate default on its debt.  The “bad news” is there wasn’t much movement in terms of actual bipartisan policymaking, and the Democrats seem to have totally caved in to the Norquist-led entrenchment of the Republicans on taxes–as in No New Ones.

There are no revenue increases in this first round of deficit reduction, and if the second round’s special committee of sitting members of Congress (yet to be named) fails to agree on enough deficit reduction, the triggered automatic cuts will leave tax policy untouched as well.

Bill puzzles over the Democrats’ poor negotiating strategies on this issue:

[T]hat leads directly into the remarkable politics of the situation. The deal that was enacted is, politically, a complete capitulation by the Democrats. There are no tax increases as part of the initial trillion-dollar package. That package is all spending cuts, which was the original Republican position.

It’s particularly notable that the deal is all spending cuts when public opinion clearly wanted a mix of tax increases and spending cuts. In just the most recent example of this fact, a July 18-20 CNN/ORC International poll showed that almost two-thirds of respondents preferred a deal with a mix of spending cuts and tax increases. Only 34% preferred a debt reduction plan based solely on spending reductions. Also, the plan that was enacted was significantly to the right of the Gang of Six proposal and the Bowles-Simpson commission. It’s as if the two parties each started out on their own 25 yard line. The Dems moved to the 50 yard line, while the R’s moved back to their own goal line. Then the agreement was settled on the Republican’s 25 yard line, right where the Republicans started.

The proposal to enact the new commission’s policies or enact an automatic trigger virtually guarantees no new taxes because the automatic cuts are all on the spending side. The Obama administration’s defense of this is, in Gene Sperling’s words, quoted by CNN: “You want to make it hard for them just to walk away and wash their hands. You want them to say, if nothing happens, there will be a very tough degree of pain that will take place.” While I have affection and respect for Sperling, and his comment reflects a sound strategy, that strategy has nothing to do with the actual outcome in this case. If the Democrats wanted the Republicans to bear “pain” or to pay attention to a “reform or else” situation, they would have been well-advised to include tax increases in the “or else” part. It is certainly not going to be easier to negotiate with the Republicans when the do-nothing alternative is all spending cuts.

I’m annoyed, too, but I’ve been annoyed with the Democrats’ (including most importantly President Obama’s) position on the Bush tax cuts for years.  And I am more hopeful about the “second round” possibilities than Bill is.  For one thing, Speaker Boehner spelled out his interpretation of the “no new taxes” pledge in his powerpoint presentation on “the deal.” It calls for tax reform that sticks to the “current-law baseline,” suggesting that that prevents taxes from being raised.  But that only prevents revenue levels from coming up relative to current law, which has all of the Bush tax cuts expiring at the end of 2012.  It certainly doesn’t rule out revenues coming up relative to current policy, which is fully-extended and deficit-financed Bush tax cuts.  There’s a difference between the two standards that’s worth $2.5 trillion over ten years by the Bush tax cuts alone.  So there’s a lot of room for a second round of deficit reduction–I mean deficit reduction relative to “current policy” only, not current law–that’s quite heavy on the revenue side of the budget, if this is where Boehner means to go with this.

This would turn out to be quite a good deal for the Democrats who want revenues to be an important part of the solution.  It would raise revenue and reduce the deficit even more than President Obama himself has ever proposed.  So maybe we shouldn’t consider “the deal” as one where Democrats gave away everything to the Republicans.  I think they’re genuinely negotiating with themselves, too.  And Republicans will have to come to grips with what they as a party really mean by “no new taxes.” Perhaps the most important negotiations over the next few months leading up to the “next round” of policy agreements will be within each of the political parties rather than between them.

23 Responses to “Is This Really a Raw Deal for Democrats?”

  1. comment number 1 by: Patrick R. Sullivan

    ‘It’s as if the two parties each started out on their own 25 yard line. The Dems moved to the 50 yard line, while the R’s moved back to their own goal line. Then the agreement was settled on the Republican’s 25 yard line, right where the Republicans started.’

    Somebody doesn’t understand football.

  2. comment number 2 by: Brooks

    I guess the Republican argument is that they compromised in the sense of accepting lesser spending cuts than they would have liked for that size of debt limit increase, but my view is that the Republicans made no substantive ideological/policy compromise and the Democrats capitulated.

    Perhaps this is a case in which the side that prevailed was the one apparently willing to sacrifice the baby (i.e., tank the economy) if it didn’t get all it wanted without providing any concessions. Perhaps if it all took place in Solomon’s court it would have been the Republicans who left empty-handed.

    Amid a divided public on the matter, and divided government, I consider it unethical for one side to maintain a sustained threat of economic disaster unless it gets some major ideologically pure legislation reflecting policy/ideological preferences (not as some necessity to avoid some disaster of similar scale).

    As a note, if Obama’s demand of a larger (longer) increase of debt limit always seemed odd to me and not credible. What would be his explanation if his only remaining objection to some legislation on his desk were that it didn’t prevent the possibility of economic disaster for long enough, and therefore he would reject the legislation and cause the disaster now?

    Also as a note, Boehner to his credit was, at least at one point, apparently open to some revenue increases as part of a larger deal. Seems he would have backed off from it if he and Obama had actually worked out something like that, given he couldn’t even get his own bill through initially.

  3. comment number 3 by: Brooks

    (didn’t mean to include “if” in “As a note, if Obama’s demand…”)

  4. comment number 4 by: AMTbuff

    Here’s a better analogy. Two people are at opposite ends of a leaky boat and they are fighting each other to make sure that the other end sinks first. Neither one wants to grab a bucket and bail because that’s hard work and it would just give the other person an opening for a knockout punch.

    This deal, even in the unlikely event that it produces the advertised deficit reduction, is not nearly enough to forestall a fiscal crisis. Someone needs to educate the public about the magnitude of change that is required. If only Jon Stewart were up to task…

  5. comment number 5 by: Brooks

    AMT,

    I disagree.

    First, let’s say there are a bunch of innocent children in the boat who will certainly drown if they don’t start bailing out water.

    It’s more like one guy is saying “Let’s both bail out some water with one hand and punch with the other hand, so we’ll both feel some pain, but neither of us can land a knockout punch, and maybe we can prevent our boat from sinking if we do this and perhaps build on it.”

    And the other guy is saying “I AIN’T Bailin’ nothin’, jerk-face. If you don’t want all these kids to sink, YOU start bailing!”

    So the guy that cares more about the kids starts bailing, taking shots from the other guy.

  6. comment number 6 by: ST Dog

    They didn’t need explicit tax increases in this plan, they’ve got plenty alreaxy happening, just not in the Federal Income Tax Code.

    Just today they anounced a new requirement that will increase health care coverage costs for everyone by Jan 1, 2013. So now all the males out there get to pay for no cost women’s health options as required by law. Wonder if the companies have to give no cost prostate exams, condoms, and HIV tests to men?

  7. comment number 7 by: ST Dog

    As for this deal, it’s a complete waste of time.

    $3.8T spending in 2011, of which $1.6T is borrowed. So, they’ll “cut” $900B over 10 years, so $90B a year, though I expect it’s heavily backend loaded. So they’ll only borrow $1.51T next year.

    And if they get the full $1.5T in extra cuts (again, over 10 years)? At best they still borrow $1.36T.

    But, my understanding is they aren’t even actually cutting in the common understanding. Insted it’s the typical DC reduction in growth, so I fully expect the 2012 spending to be more than 2011.

    It’s all a farce. Until spenduing from year to year is reduced we are not even close to fixing the problem.

    As for “revenue” increases. It’s little help. tax income over $250k at 100% and you only get $1.4T. That doesn’t even cover the 2011 deficit after the “cut” earlier this year.

  8. comment number 8 by: El Gipper

    I’d like to address the claims by many commentators that using the debt limit vote is somehow un-democratic and extortionist.

    That is complete nonsense.

    If the Democrats don’t want to subject themselves to Blackmail, then they’ve got to have the guts to raise enough revenue to pay for their welfare state wish list. The Republicans are under no obligation to facilitate this undertaking. The Democrats use their cheap soak the rich, class warfare, divide and conquer electoral strategy to win elections. The Republicans use use the debt limit vote every time to chop up the heinous welfare state built up using that malicious, envy-based electoral strategy used by Democrats.

    This is nothing in comparison to Democrats’ use of the court system to legislate from the bench a whole host of left-wing agenda items, under the guise of the “living constitution.”

    I’m saddened that the Republicans were led by idiots who listen to Grover Norquist instead of focusing on eliminating spending programs. We could have used this debt limit vote to repeal the PPACA. That would have actually accomplished something concrete. Instead, these knuckleheads were hard up for a Balanced Budget Amendment.

    Good LORD!

  9. comment number 9 by: AMTbuff

    There’s no way that Boener had the votes to hold firm on a demand to repeal Obamacare. Using a fiscal responsibility tool to achieve a partisan policy objective is political poison. Republicans can’t do anything about Obamacare until 2013, and I doubt they will repeal it even if they win the election.

    Absent full repeal, Obamacare will succeed in its primary mission to destroy the private insurance market. After that it’s a choice between fully private health care with no insurance and fully public health care. We will end up with the British system. Bet on it.

  10. comment number 10 by: PAYGO

    Just a heads up that Boehner’s assertion that the current law baseline makes it “impossible” for the committee to raise taxes is a good sign, but for a different reason than you suggest. What he means is that it makes it very difficult to play around with marginal income tax rates because once you change all the rates, then that’s scored as increasing the deficit all the way from current law (i.e., all Bush tax cuts expiring), which would make hitting the $1.5 trillion target difficult. But eliminating tax expenditures still counts as reducing the deficit against any baseline.

  11. comment number 11 by: Jim Glass

    Keith Hennessey considers the winners and losers, and analyzes the strategic implications of the deal going forward for both sides.

    http://keithhennessey.com/2011/08/01/bca-strategy/

  12. comment number 12 by: Shadowfax

    Obama’s 2012 budget had debt rising from $14.3T today to $24.3T by 2021. So he didn’t give up much with this minor expense avoidance deal. We forget that in 2007 we spent $2.9T; now we spend $3.5T, so he’s made much of this $600B increase permanent.

    Ladies and gentlemen, he has given up nothing.

    Obama has the leverage when the taxes expire, as he can veto any attempt to extend them. This is a massive bargaining tool he can use to get tax hikes on just the rich.

    Way to go Mr. President, one step ahead of them all the time. Now let those tax cuts expire.

  13. comment number 13 by: Jim Glass

    I may be getting cynical as I age but my first impression after scanning the deal is that it is *extremely* backloaded, budget-savings wise.

    Well, we know that 10 years from now there’s going to be a real budget crunch on so there are going to *have* to be cuts then.

    To the extent this deal promises to make cuts *later*, then, that they’d be forced to make later, then, anyhow, the cuts are no cut at all.

    And of course there will be four more Congresses between now and then with the chance to re-write this deal before the backloaded cuts hit.

    Meanwhile, the “real time” cuts in 2012 are teensy weensy.

    This enables everyone to claim victory. The Republicans in the House can claim they won billions of dollars of spending cuts with no tax increase. The Democrats in the Senate now, as Hennessey explains, get to continue onward without making any buget resolution at all — so they can’t offend anybody, and can pose as anything any constituent wants them to be. And Obama gets to claim credit for solving the crisis, being a budget cutter, and also leaving the door open to get new tax revenue in the future. Win! Win! Win!

    And best of all, they all get to claim their wins and defict cutting prowess *without* actually cutting any money going to any constituent — which makes it a *true* victory going into the next election.

    I’ve said it before, and I hate to say it again, but I still believe we will never see any *real time* cuts in spending or the deficit until the credit rating of the USA feels pressure from the market on the basis of the USA’s fundamental credit worthiness, not political spats like this.

  14. comment number 14 by: Vivian Darkbloom

    I think Economist Mom is not reading the tea leaves corectly. First, read the series of comments Keith Hennessey wrote on this deal (Hennessey is absolutely amazing in his ability to tear down this stuff and explain it clearly, concisely and accurately and almost in real time).

    As Hennessey explains, the R’s have ensured that there will be at least $1.5 trillion in additional spending cuts. All they have to do is not agree to new taxes in the joint committee process—a result that is very likely if Boehner hand picks people who will ensure this result. The only cost is that they will need to allow cuts in defense spending, but my guess is that they will allow that (and I just wonder how real these cuts would be given the likelihood of “emergency” defense spending loopholes).

    Obama might be thinking that his veto threat over extension of his own tax cuts is the next hostage. I suspect that when the time comes the R’s will get legislation through the House (and quite possibly the Senate) to extend those cuts (that is, in their entirety). Would Obama veto such a bill in an election year? I seriously doubt he would risk the wrath of middle class taxpayers for a tax increase, and I think he would get most of the blame in that scenario. Tax increases always “cut the deepest” because they have immediate effect. Even major entitlement reform does not have this effect because most of the changes affect future retirees and not current AARP members.

    As I see it, the real loser here is tax reform and for that I blame mostly the R’s in their steadfast refusal to allow any revenue increases even in compromise. If done correctly, the much needed reform to the tax code could deliver more economic growth even if there is some increase in revenues. That’s a pity, because it seems as though the Gang of Six had come to some general consensus which even included moving toward a territorial corporate tax regime. I hope I’m wrong, but I can’t foresee any scenario in which major tax reform is going to get accomplished in this process.

  15. comment number 15 by: Anandakos

    Maybe losing the 2012 elections will wake Barack Obama up (finally) and make him mad enough to veto any extension of the Bush/Obama tax cuts. He WILL be President when they first come up for extension; that’s a certainty barring impeachment or incapacity.

    Now the new Republican president may just turn around and re-pass them on January 21st, but for three blessed weeks the United States will be (closer to) living within its means.

  16. comment number 16 by: Vivian Darkbloom

    Further to my comment above regarding the use of the veto threat to prevent extension of the “Bush-Obama Tax Cuts”, the White House “Fact Sheet” on the deal has this to say:

    “· The Enforcement Mechanism Complements the Forcing Event Already In Law – the Expiration of the Bush Tax Cuts – To Create Pressure for a Balanced Deal: The Bush tax cuts expire as of 1/1/2013, the same date that the spending sequester would go into effect. These two events together will force balanced deficit reduction. Absent a balanced deal, it would enable the President to use his veto pen to ensure nearly $1 trillion in additional deficit reduction by not extending the high-income tax cuts.”

    Two questions (really three):

    1. Under what scenario does the White House realistically think a bill will reach President Obama’s desk which extends *only* “high-income tax cuts”? Or do they think the President has line item veto?

    2. Does the President actually have a special pen for vetos?

  17. comment number 17 by: William

    Of course the party not willing to hurt people is going to lose. The Republicans are willing to let real people suffer if they don’t get their way. Democrats aren’t. So Democrats lose.

    This “soak the rich” argument is pure crap. The rich maintain their wealth on the backs of the average person and the poor. All cuts hurt the poor because they have no clout. Nobody cares.

    By the way, the one clever detail that seems to be overlooked is this. When the bipartisan group meets, if the is no deal, defense gets cut too. Guees what. That sets up a war within the Republican party between the “no taxes ever” group and the defense hawks. Hmm.

  18. comment number 18 by: SteveinCH

    Vivian

    1. This is a good indication that the President will sign what hits his desk as long as the rates paid by “middle class” taxpayers are not increased. For those looking for him to get tough, this is an early sign that that won’t happen.

    2. I think for big important bills, he uses a whole bunch of pens so he can give them away as gifts. Although that’s signings not vetoes. Come to think of it, I don’t even know if the President has to sign a bill to veto it. Interesting…

  19. comment number 19 by: AMTbuff

    William, in what world is it possible that real people will not suffer when deficits of 10% of GDP are ended?

  20. comment number 20 by: SteveinCH

    AMT,

    Don’t be silly. If we just take the 10% from the rich, the problem will be solved. Fewer private jets maybe but the rest of us will be fine.

  21. comment number 21 by: Vivian Darkbloom

    Steve,

    This is what Keith Hennessey had to say recently about the veto process:

    “The President does not write anything on the bill to be vetoed. Instead, he sends a “veto message,” which looks like a letter, back to the House that originated the bill. He signs the veto message, but that is not technically required by the Constitution. The bill is technically vetoed when it arrives back at the House or Senate. And there is no veto stamp. Sorry to disappoint you.”

    So, according to Keith, there is no special “veto stamp”, but he doesn’t rule out that there could be a special veto pen used to sign that message.

    On the other hand, there is also the “pocket veto”. That is where the President puts the bill in his special “veto pocket” for 10 days. I am told that sometimes the President forgets to take it out of the special veto pocket and it gets washed in the White House Washing Machine.

    But, seriously, the point is that the White House is trying to assure its followers that the President’s potential veto over any tax bill gives him special leverage the next time around. For the reasons stated above, I think that potentially puts him in a very difficult spot such that he might wish he did not have that “leverage”.

  22. comment number 22 by: pastananda

    Here’s to bipartisanship! It was sweet to behold the two parties finally coming together to save the rich once again. Thanks guys and gals. I think I’ll run out now and buy that 7th yacht I’ve been dreaming of.

  23. comment number 23 by: Kenneth Althaus

    To many either liberal wannabes or not enough thinking. 1st their is no revenue problem, government takes in over 2 trillion in all taxes collected, the problem is the spending! Why do they need to spend money on duplicate bills? If SS was not to be paid or the military why didn’t they just work for free? I mean, hell Obama had done nothing but vacation, golf & waste taxpayer money since taking office, spent money so Moochelle can take friends on an extravagant shopping trip (wasted money) vacations that middle class Americans can only dream about (on the taxpayers dime) so how in the hell can anyone say we need to raise taxes? That is rediculous! Ok & say we did raise taxes on the rich or corporations, who do you think is really going to pay them? I’ll give you a hint: not the rich. So take Mr. Obama’s blank check, credit card & spending powers away & force him & democraps to start living with in the countries means!!!!!!! Oh, & Mr Obama DID NOT make any tax cuts, he extended those that were already in place by President Bush