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November 09, 2012

Pressure Increases for a Grand Bargain Without Any Policy Rationale

Posted in: Uncategorized

Chuck Schumer, obviously running point for Senate Democrats on fiscal slope negotiations, claims that a chastened GOP will be willing to deal. But the only party who has made any concessions on a deal has been Chuck Schumer, floating an extension of current tax rates for upper-income earners, accompanying a limit on deductions. He went further this morning:

“The election, what did it say,” he continued. “You elected a Republican House, and what was their watch-word: cut spending. You elected a Democratic Senate and a handsome victory for President Obama. What was our platform? The wealthy should pay a little bit more and there should be new revenues. Just marry the two. The trick will be if Speaker Boehner’s instincts to preserve the Republican Party and preserve the nation in a certain sense, will prevail over the hard right. He needs some help.”

Schumer said in return, Democrats would be willing to negotiate changes on matters close to their party, such as Medicare and Medicaid, and indicated Obama might say as much in an address from the East Room of the White House on Friday.

So Republicans get the same tax rates, and Democrats… no wait, Republicans ALSO get spending cuts (from a discretionary baseline that’s the lowest in 60 years) and unspecified “changes” to Medicare and Medicaid. This is a deal?

Paul Krugman comes out representing the other perspective of this debate – there’s no need for a deal of any kind.

Mr. Obama should hang tough, declaring himself willing, if necessary, to hold his ground even at the cost of letting his opponents inflict damage on a still-shaky economy. And this is definitely no time to negotiate a “grand bargain” on the budget that snatches defeat from the jaws of victory [...]

Republicans are trying, for the third time since he took office, to use economic blackmail to achieve a goal they lack the votes to achieve through the normal legislative process. In particular, they want to extend the Bush tax cuts for the wealthy, even though the nation can’t afford to make those tax cuts permanent and the public believes that taxes on the rich should go up — and they’re threatening to block any deal on anything else unless they get their way. So they are, in effect, threatening to tank the economy unless their demands are met.

Mr. Obama essentially surrendered in the face of similar tactics at the end of 2010, extending low taxes on the rich for two more years. He made significant concessions again in 2011, when Republicans threatened to create financial chaos by refusing to raise the debt ceiling. And the current potential crisis is the legacy of those past concessions.

Well, this has to stop — unless we want hostage-taking, the threat of making the nation ungovernable, to become a standard part of our political process.

Just as important to this perspective is the point that Democrats gain far more leverage by letting most, though not all, fiscal slope elements expire. And importantly, it’s not a cliff – the economy can absorb the expiring measures for a few weeks or even a few months. In fact, OMB can structure the sequester cuts so they have no immediate effect, and Treasury, in anticipation of a resolution, can even freeze withholding rates, so the tax changes have no immediate effect. There’s simply no reason to bind to anything in the lame duck session, given the leverage points in the system.

More than that, in economic terms, moving forward on austerity is absolutely insane. The relative lack of austerity and continued budget deficit in the United States, mostly due to gridlock, has kept the economy ahead of competitors. To the extent that there has been softness in the economy, it can be directly attributed to austerity – fiscal policy at the federal, state and local levels have actually dragged on growth since mid-2010, though not as much as it would if we let all these fiscal policies expire.

John Boehner doesn’t want a deal hammered out in the lame duck, but he wants a framework put in place for tax and social insurance program reform, with the only tangible elements to be a “down payment” of $100 billion in spending cuts. In other words, his plan to react to a winning Democratic election is for Republicans to dictate more spending cuts.

If Democrats trod down this path, it’s important to recognize that they do it willingly.


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