Retrench Warfare

AP Photo/Alex Brandon

Senator Mike Johanns, a Republican from Nebraska, left, walks with Senate Minority Leader Mitch McConnell from Kentucky to the Senate floor for a vote on the fiscal cliff early this morning.

The Senate vote just before dawn in favor of a permanent tax hike on the top one percent defers virtually all of the other budget battles. Assuming the House follows suit today, it is up to President Obama and the Democrats to radically change the conversation.

In the deal that the Senate agreed to, with only eight senators voting against, the Democrats won big in two respects. They forced the Republicans to raise taxes on the rich, and they took all spending cuts including in Social Security off the table—for now. If Tea Party Republicans vote against the deal and it passes the House with the voters of nearly all Democrats and a few dozen renegade Republicans, it could cost John Boehner his Speakership.

But automatic cuts of $120 billion this year and $1.2 trillion over a decade—the dreaded sequester—were postponed only for two months. So the budget debate ends for the moment, only to start again next week.

The trouble is, Congress and the president are waging the wrong debate. The debate they are having is about how to cut deficits and debts. The right debate is how to get a strong recovery going.

The fiscal cliff was advertised as a potential catastrophe because it would have cut spending and raised taxes by a total of $607 billion in a single year—a fiscal contraction that the Congressional Budget Office says would have pushed the economy back into a recession. But if that cliff was a one-year fiscal disaster, what would ten-year cuts of $4 trillion do to the economy?

It never made any sense to impose larger long-term cuts as a way to head off a short-term contraction. This was always snake oil peddled by the austerity lobby.

Tactically, President Obama is now in a better position to bargain harder over cutting less and raising taxes (on the wealthy) more. But the entire premise of the debate is wrong. We should not be cutting public spending at all. We should be increasing it, because the economy needs both the stimulus and the long-term public investment.

As long as Obama buys into the premise that deficit cuts are the necessary road to recovery, he will have to agree to at least some cuts. In this round, he has done a better job than in the past of clarifying his differences with Republicans on the issue of taxes, but now he needs to move off the idea that austerity can produce recovery—and corner Republicans on that issue the same way he did on taxing the rich.

With Republicans licking their wounds over the fiscal-cliff deal—they were forced to tax the rich and then didn’t get spending cuts—Obama has a very strong hand. The question, as always, is how he will play it.

One other detail: I think it was a mistake, both substantively and tactically, not to extend the two-percentage-point tax cut in payroll taxes. A majority of workers pay more in payroll taxes than in income taxes. With the fiscal-cliff deal, the public thinks that 99 percent of Americans have been spared a tax increase. But in the first pay period of the new year, everyone’s payroll taxes go up two percentage points. That’s a thousand dollars a year on a median income of $50,000.

Better to continue that break on our most regressive tax, and make up the difference by raising the cap on income subject to the tax. That should be added to the debate in the next round.

The fiscal cliff was billed as a one-time, high drama. But that premise, like the fiscal cliff metaphor itself, was way off. This will be more like trench warfare. Obama—and sensible economic policy—will win only by drastically changing the way Americans think about deficits and economic recovery.

Comments

Mr Kuttner has very astutely and concisely analysed this most recent episode in the battle over the purpose and necessity of the federal government.

The GOP led by their TParty members have clearly stated their view that government is too big , overreaching and harmful to the "free market" and our liberty as citizens. Their task has been to prove how bad and ineffective government is so they can point the finger of blame at it and the Democratic President and party who have done so much good up until now through government. They've done this by obstructing every effort to help the majority of Americans get economic help, new and better paying jobs, and access to education and health care!

The last skirmish in their scorched earth battle was the previous Debt Ceiling where they extorted the vast majority of Americans to extend the Bush Tax Cuts to the richest few over their threat to cut off millions from unemployment benefits! Though the President previously said he would never do so he extended the Bush Tax Cuts on the Rich as a paid ransom to help the unemployed.

Over the last couple years of Presidential Campaigning, the President repeatedly said he would not extend the disastrously costly Bush Tax Cuts on the rich because we could not afford it and they didn't ask for it. America by a margin of over 5 million people voted for him largely based on that argument! Now the GOP resorting again to threatening the unemployed have used the phony self created crisis of the Fiscal Cliff to to get the Bush Tax Cuts extended just this time only on those making less than $400,000.

The same vile extortion tactics were used by the Republican Congress and the President and Democratic Congress again paid the ransom only this time paid less and prevented more harm. So we have clearly gotten better at paying ransom.

What we have not done is clearly addressed the real issue here, the real reason our government exists and that is to take measures to create the conditions for and access to the broadest based economic growth for all Americans. To do that we must stand up and speak out about the false idea that cuts create jobs and that the deficit is our most urgent national priority!

Shared Sacrifice has just two big problems associated with it. One, the Middle Class has sacrificed too much already and some would say been sacrificed so that the very well off and well connected could prosper in these harsh economic times. The second problem is the Rich and their powerful allies will Never sacrifice anything as we've just seen they will continue to blame the poor and protect their loopholes and corporate welfare! We Democrats are not about "conserving" wealth but we are about Expanding Opportunity and creating broad based economic growth! That is why I mounted a campaign to get our people to stop preaching the false Republican mantra of Shared Sacrifice and instead promote Shared and Fair Prosperity!

The real crisis is long term unemployment and the massive wealth inequality gap that has threatened the sustainability of our economy and nation. We must have a healthy, well educated middle class with growing upward economic mobility if we are to survive and thrive in this global economy. I hope our leaders and my fellow citizens get back to the real crisis and call the Republican Congress out on their harmful ideas and tactics.

I almost always agree with Kuttner, but here he seems to forget that this is a permanent tax CUT, from the Clinton rates in effect at the time of the House vote. Even the super rich got a cut on their first $450K of income. Consequently it is a HUGE gain for Grover Norquist's long game to starve the beast. It may be possible for Obama to regain much of the lost ground if he can get enough in real tax reform, eg ending the mortgage deduction for mansions and multiple homes, and major cuts to corporate subsidies and military spending. Unfortunately this deal already taxes unearned income from dividends at 20%, compared to the 39.8% top rate on earned income, and extends tax immunity for overseas profits of transnationals.
Of course Bob is right that the entire debate is based on the folly of cutting deficits when we need more stimulus, a framework extracted by the GOP in the last tax ceiling showdown. Above all, we need MUCH more spending on a transition to clean energy, before the climate crisis becomes catastrophic.

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