Deal with the devil
Here’s Kevin Drum:
There are a few liberal pundits out there who believe that a cuts-only deal like this one isn’t all that bad. Jon Chait is one of the leading proponents of this theory, and it goes like this: Maybe an all-cuts deal is bad, but by leaving taxes off the table completely it opens the door to letting all the Bush tax cuts expire at the end of next year. Basically, Obama just needs to keep insisting that he’ll only sign a bill that extends the middle-class tax cuts1 but allows the tax cuts for the rich to expire. Republicans will flatly refuse to send him such a bill, and as a result all the tax cuts will expire without Obama having to break any promises.
So here’s the question: do you think this is how things will play out? Or alternatively, will Republicans cave in at the 11th hour and send Obama a bill he can sign? Or will Obama cave and end up agreeing to extend all the cuts? My guess is that Obama will stick to his guns on this and Republicans will eventually cave, which means that the middle-class cuts will get extended permanently.
And here’s Jon Chait’s most recent take on the debt ceiling, ending on a somber note:
The problem, though, is that we can’t be sure Obama really intends to draw that line. There’s a limit to how much faith one can place in a man who has so badly misjudged his political opponents time and time again. The debt ceiling ransom may be a shrewd strategic retreat, or it may be the largest in a series of historic capitulations. We won’t know until the fight over the Bush tax cuts has been settled.
The narrative of Obama as a shrewd political tactician slyly manipulating his opposition is looking less and less like reality. That he has badly misjudged his Republican counterparts is looking more and more like the truth of the matter.
Ezra Klein was right: Democrats were playing chicken when they didn’t raise the debt ceiling back in 2009. As he asked at the time, “If Democrats weren’t willing to shoot the hostage on the tax cuts, what makes anyone think they’ll allow it on the debt ceiling?”
And if Democrats cave on debt ceiling negotiations in 2011, why should we expect them not to cave when the tax cuts are once again on the table in 2012?
The good news about the deal is that the cuts are mostly backloaded. Only 1 percent of the cuts come in 2012, making them less likely to directly hurt the economic recovery. The trigger mechanism is also decent. With major defense cuts in the offing if no further deficit reduction package is signed, we could potentially see the most significant scaling back of defense spending in decades. This would be good news, at least if it carried with it some assurance that we would drop fewer bombs and invade fewer countries. It’s hard to imagine that’s part of any deal, however. Defense cuts, as much as we need them, aren’t a metamorphosis of cultural attitudes toward war. And they have an economic impact at home, even if it is money well-saved.
It’s sort of depressing to think that we’re talking so much about which deficit plan is the best, or how many trillions this or that plan would cut, and how many trillions more we could get through tax hikes, when the fact is we should really still be focused on getting growth back in the rest of the economy. There is a time for cuts and a time for restoring fiscal balance. This is not that time. My faith that anyone in Congress or the White House realizes this has been greatly diminished. As much as I think that we should let the Bush tax cuts expire if we are going to keep obsessing over the deficit, I can’t imagine it actually happens.
The fact is, two problems face our long-term fiscal outlook. On the one hand, we are in a recession and we need to restore growth. On the other hand, we spend too much on healthcare.
We spend too much on war and the War on Drugs and a number of other wasteful policies, but healthcare is where the money’s at. If you want to tackle spending, you have to take a smart approach to our healthcare entitlements. Again, I just don’t see anyone who obsesses over deficits taking anywhere near as much time obsessing over how to properly reform our health spending.
Hint: it requires more than simply turning Medicare into a voucher program. And it may require us to tinker with taxes, including cutting some and raising others. Since one half of our elected officials face certain damnation and an eternity bound to Grover Norquist in the deepest, darkest circle of Hades if they even think about raising taxes, don’t expect much on that front. We can’t even spend money to save money.
P.S. Also Paul Krugman making the point I’m trying to make about cuts during a recession:
We currently have a deeply depressed economy. We will almost certainly continue to have a depressed economy all through next year. And we will probably have a depressed economy through 2013 as well, if not beyond.
The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record.
Indeed, slashing spending while the economy is depressed won’t even help the budget situation much, and might well make it worse. On one side, interest rates on federal borrowing are currently very low, so spending cuts now will do little to reduce future interest costs. On the other side, making the economy weaker now will also hurt its long-run prospects, which will in turn reduce future revenue. So those demanding spending cuts now are like medieval doctors who treated the sick by bleeding them, and thereby made them even sicker.
True Keynesianism is hard. The ‘deficits-don’t-matter’ line during a recession has to be ‘deficits-really-really-really-matter’ during boom times. We should run surpluses and cut back government spending as much as possible after the recession. Just not yet.