We have had a couple of days to digest the details of the compromise tax agreement reached between the White House and the Republican leadership from the other end of Pennsylvania Avenue. Most of the discussion has sought to parse the agreement politically, in true Inside-the-Beltway fashion: did President Obama “get the best deal” possible; will it help his re-election campaign in 2012, especially among the (crucial yet fungible) independents; has he moved enough to the (mythical, movable) Center; has his leftist base completely lost faith in him; will the Republican members on the Hill vote for the deal, but so-called liberal Democrats not, and so on? What I want to know, however, is this: is the Obama-GOP Tax Deal good for the country? I am not so sure, and that question has received remarkably little attention
First of all, we have to start from where we are, not from where we would like to be, and this applies to all parties involved. Example: Senator John Kyl (R-AZ), whose nose is every bit as out of joint as that of Representative Chris Van Hollen (D-MD), neither of whom were included in the bargaining session, says he intends not to vote for The Deal, and will offer extensive amendments. On the other side, Steven Pearlstein in The Washington Post on Wednesday, 8 December, unreeled a fantasy scenario in which 1) the Democratic House passes tax cuts for the working and middle class (paid for by not extending tax cuts for the wealthy), which also provided “tax breaks for businesses that hire workers or invest in equipment;” 2) the Democratic Senate tries to pass the House bill, Harry Reid forces balky Republicans “to mount a real-life filibuster” which drags on toward the deadline, and 3) the Democratic President “sets himself up in a room at the Capitol, ready to sign a tax cut for the middle class and veto any tax cuts for millionaires;” and, on December 31st either Republicans have caved, Obama signs, or Republicans hold firm for their millionaires, there is no tax cut for anyone, and the entire country sees the GOP for what they are, lackeys and shills for the wealthy. Hmmm, good show, Mr. Pearlstein, but not the real world.
Since Congress failed to address the tax cut expiration earlier in the session, we now face a short fuse deadline, because on 31 December the so-called temporary Bush tax cuts will expire for all categories of tax payers; in addition, unemployment benefits are running out, or have already run out, for several million Americans, just before Christmas—- all this, while the wobbly economic recovery engendered by the earlier stimulus is showing signs of being easily derailed- a kind of bad-news trifecta. Probably because of his disastrous experience with health care legislation, President Obama chose not to leave resolution of this trifecta in the hands of Congress. He must have decided that middle class tax cuts could not be allowed to lapse, and that he had to find some additional ways to juice the recovery and ease the pain average citizens were suffering. Doubtless, he also had a personal eye on 2012.
He therefore took negotiations into his own hands, dealing directly with Senator Mitch McConnell (R-KY), Minority Leader in the Senate, thus showing himself, as E. J. Dionne said in The Washington Post, to be “an inside technocratic dealmaker…. (willing to) negotiate with anyone to get what seems sensible to him,” rather than a political leader who can “carry on a sustained argument on behalf of his overall objectives.” In that sense, then, The Deal probably is the best the country could expect. So, what did we get?
* a 13-month extension of benefits for unemployed (but not for those long-term unemployed whose benefits have already lapsed, the so-called “99ers”);
* a 24-month continuation of the Bush tax cuts for wealthy as well as middle class;
* expanded earned-income tax credit;
* equipment purchase write-offs for businesses;
* a continuation of college tuition tax credit;
* a temporary reduction in the Social Security payroll tax;
* a re-institution of the 35 percent estate tax (that’s what Republicans call a “death tax”), but raising the exemption to $5 Million per person;
* and an extension of the capital gains rate of 15 percent.
According to Dionne, in exchange for about $100 Billion for the wealthy, Obama secured $197 Billion for the “non-rich,” $146 Billion in business tax cuts to encourage job creation, and an extension of $280 Billion middle-class tax cuts—-more than many liberals honestly had hoped. In comparing the tax cuts, a chart in The Washington Post on 9 December showed that the Obama-GOP Deal provides larger average cuts than those in either party’s original plans:
1) Someone earning less than $10K would receive a cut of $53 under the original Democratic plan, $52 under the Republican, and $234 under the Obama-GOP Deal;
2) Someone earning $30-$40K receives $896 (Dem), $894 (Repub), and $1,431 (The Deal);
3) Someone earning $75K-$100K receives $1,900 (Dem), $1,871 (Repub), and $3,486 (The Deal);
4) Someone earning $200K-$500K receives $6,743 (Dem), $7,152 (Repub), and $10,984 (The Deal); and
5) Someone earning $1Million+ receives $6,349 (Dem), $103,835 (Repub), and $139,692 (The Deal).
Right there, one can understand why the rich-loving Republicans might like The Deal, and why Democrats might appreciate that the suffering lower tax brackets will get survival money which will immediately be spent, thus stimulating the economy. Indeed, some have described The Deal as another stimulus package, in lieu of another upfront stimulus, which in any case is utterly unobtainable in today’s political climate.
Therefore, The Deal-as-stimulus is good, if one believes, like many economists, that the original stimulus was inadequate, and that Bernancke’s QE2, which is pumping billions of fiat dollars into the Federal Reserve system, is doing little good for the domestic economy, and will bring on serious inflation. I say this even though, as President Obama complained, Republicans held the middle class hostage in order to gain succulent goodies for the very rich (who supposedly now will “create jobs” even if they did not do so during Bush years when they had the same tax cuts).
What about downstream? Did Obama, as Bush so often did, not think more than one move ahead? In his zeal to encourage the recovery, “change the tone,” and snuggle up to so-called independents, did Obama ignore what comes next? Here are some questions:
* What does this sort of negotiating with those who have explicitly said their agenda is to make him “fail,” while excluding from the negotiations members of his own Party leadership on the Hill, do to future legislating—- how much help will his own Party give him in the future, how long will the rebellion of House Democrats last?
* Has Obama in effect negotiated away any chance for raising taxes as part of a future deficit reduction; is this extension going to turn out to be permanent, despite being called “temporary,” especially since the extension comes up again in election year 2012?
* If so, when the Deficit Commission recommendations come up for action, will Obama be boxed in, forced to cut Social Security, unemployment insurance and other “entitlements” since Republicans will refuse to raise taxes, since he has already cut contributions to Social Security, not only making its shortfall greater, but signaling it is vulnerable?
* Given the actual subject of these negotiations, what about the national deficit, how will it play out, since clearly The Deal as a whole will add at least $900 Billion to the national debt?
In other words, is The Deal booby-trapped, is it a time bomb?
Listening to many conservative pundits, it is obvious they think Obama has blinked, and this does not bode well for the future. The stock market, which initially rallied on hearing about The Deal, later sold off, and it looks as though bonds have tipped over into a secular bear market, partly because of investors’ concerns about The Deal’s adding still more to the deficit. Bond holders are scared spitless by the seemingly unstoppable mushrooming of the US national debt; please note The Deal did nothing about tackling the deficit, in fact, it added to it, which strikes international moneymen as more political cowardice. Because, during recent auctions, the US has had a harder and harder time selling our Treasuries, the Fed has started monetizing our debt by buying our own Treasuries. Interest rates on our debt must therefore inevitably rise, and next will likely be a downgrading of US sovereign debt by the rating companies, followed inexorably by the end of the dollar as the world’s reserve currency—- in fact, this change is already underway.
Once the dollar loses that position, we can no longer print dollars at will to manipulate our economy, and we will be in deep trouble, no better than any third world country, no better even than Greece or Ireland, most likely forced into bitter austerity measures by investors holding our debt. Events, once unthinkable, could begin to happen rapidly. Example: once oil is no long denominated in dollars, the price of gasoline will rise rapidly, this will cause other prices to skyrocket since oil and gasoline are large components of every product (raw material, transportation costs, and so on). This inflation could well stall even a more robust recovery. All this may happen anyway, but it is made much more likely because The Deal adds $900 Billion, or almost another trillion to the deficit. That cannot be good.
Then, there is the unpalatable fact that in two years we will have to do all this negotiating all over again in an election year when Republicans have had control of the House for two years, doing whatever mischief you can imagine, and Obama may be in an even weaker position. Kicking the can down the road may have worked for Bush, but the unavoidable bill is coming due.
On the other hand, The Deal may well provide just the boost the economy needs to speed to a sound recovery, along with a decline in unemployment, in which case all the doom and gloom are vanquished, and Obama looks like a genius come 2012.
Of course, who knows where we will be by then, politically speaking. We can cross that bridge when we come to it, sufficient until that day is the evil thereof….. are you comfortable with that?
There are some additional questions or seeds lurking in The Deal, waiting to sprout. These seeds may not germinate, but if they do, any one of them could bring another harvest of unwanted problems, a sort of Truth or Consequences:
* Did Republicans hold not only the middle class hostage, but also approval of the START Treaty as the fee for cooperating?
* Will they honor The Deal when push comes to shove? Even more curious,
* what does Obama’s extra-curricular negotiating do to the Constitutional system of checks and balances, and the importance of Congress?
* What does it do, for that matter, to the two-party system, in which the chief executive is generally the leader of one of those parties in Congress, which party was elected on the basis of implementing a certain political agenda, only to see its leader negotiate privately with the opposition party?
* Could this develop into another change in the way we are actually governed, possibly enhancing the “unitary executive?”
* Will the Republican Party be able to divide (and conquer) the President from his own Party on the Hill? Unintended consequences may flow from The Deal.
On balance, there are many short-term benefits from the Obama-GOP compromise. The longer-term consequences are much more problematic, like putting at risk such programs as Social Security. The longer term depends largely on how strong and determined you believe Obama and the Hill Democrats will be in that future, and how politically astute the President proves to be in dealing with a Republican House, and a Senate with a large Republican minority….and, how much confidence and trust the Hill Democrats and the President have in each other.