…because I’m an economist and a mom–that’s why!

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.

A Rorschach Test on “The Deal”

August 1st, 2011 . by economistmom


Here’s a helpful summary from the Washington Post of what Democrats and Republicans “got” and “gave” in the debt limit deal.  It seems to provide a type of “Rorschach test.”  I think there are “glass half full” and “glass half empty” ways of looking at this.  Yes, on the overall down side, I’m admitting it is only (at most) half full.  But on the overall plus side, if we could only get it at most half right at this point in time, given all the political dysfunction, maybe we should be thankful they didn’t get the “whole deal” done.  At least there’s another opportunity a few months from now to try it again, and time for Americans to express their profound disappointment with how our politicians (and policymakers) handled it this time around.  On the other hand (the down side), given that the “stick” incentive for policymakers to make real policy in the next round exempts tax expenditures from the automatic cuts, that means that there’s no real “stick” being used on the Republicans at all.  That means we’re left with only a “carrot” approach to draw the Republicans into any revenue-side solution.  That “carrot” is the promise of tax reform to get the Republicans the low-rate, broad-based, economically-efficient kind of federal tax system they claim to believe in.

The question is how effectively this carrot can be dangled in front of the Republicans without the help of a stick chasing them from behind–given that the carrot hasn’t worked so far even with the stick.  I think Americans and their opinions are going to have to contribute a “virtual stick” of “shaming” the Republicans for their unwillingness to agree on a more balanced approach (involving revenues as at least part of the solution) at the same time that the policy experts work on defining the carrot of tax reform.  And by the way, I think that “virtual stick” should be applied to Democrats as well when it comes to their position on entitlement reform.  (Because, by the way, we still need to do better with those programs, too.)

It’s far from perfect, this “deal.”  But it could have been worse.  It could have ended here.  And if this deal works, at least we’ve avoided default.

Next Entries »