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Saturday, December 29, 2012

Predicting the budget outcome

I cannot say whether there will be a deal over the fiscal cliff between now and January 1. That depends largely on Speaker Boehner's position within the House, where at least a few right-wing members are thinking about removing him in the new Congress. He may have to wait until he is re-elected before making any concessions to President Obama and the Democrats at all. But I think the outlines of what is going to happen are now clear, and that they do not bode well either for our economic or political future. The eventual deal will leave us much closer to where we were under George W.Bush, who wrecked the economy, than under Bill Clinton, the last President actually to improve it. It will leave the government with a huge permanent deficit, and it will make government, which is already much too small, even smaller. And it will do virtually nothing about income inequality in this country.

President Obama had strong cards to play this time. He has just been re-elected rather handsomely in the electoral college, but more to the point, the failure of a deal before January 1, one could argue, would accrue vastly more benefit to him than to the Republicans, because it would mean the end of the Bush tax cuts across the board. I personally would favor that outcome, but there does not seem to be a single politician in Washington who does. (I have now discovered that I was mistaken here: this morning on C-Span I heard Senator Tom Harkin say that the Republicans had predicted disaster when the Clinton tax rates were passed, and tht he would be perfectly willing to have them back.) Some tax cuts would have to be undone, but that could only be done with new legislation which the President would have to sign, giving him enormous bargaining power should he choose to use it. He could either announce that he would veto any bill extending the cuts for incomes over $250,000, or demand critical changes in the tax code such as an end to the "carried interest" dodge that continually enriches Wall Street (another idea that no one in Washington seems actively to support), or insist upon giving up draconian cuts in the federal budget. He could even demand more stimulus money. But at this point, he does not seem to want to do any of those things. He wants an agreement, and that again is putting him largely in the hands of the Republicans.

The President has already raised the threshold for eliminating the Bush tax cuts from $250,000 to $400,000, and it may go higher. He apparently has no firm position on what to do about the estate tax. He wants to extend unemployment benefits and he has a proposal for a new stimulus but the Republicans will never agree to increase spending of any kind as part of a deal. The President yesterday handed the negotiating process off to Harry Reid and Mitch McConnell, and any deal they make will be subject to review and amendment by the Republican-controlled House, which is certain to water it down if they accept it at all. All indications are that the House intends to use the debt ceiling as a lever to force further spending concessions a few months down the road. Meanwhile, the President seems open to some change in the cost-of-living formula for Social Security, which may indeed be a reasonable idea depending on exactly how it is done.

Our government has become a very dysfunctional family because the goal of the Republican Party is to destroy it--and it is well known that the most dysfunctional member of any family tends to dominate it. I collated a couple of quotes last week from different sources, including E. J. Dionne of the Washington Post, to the effect that the House Republicans had shown themselves "incapable" of governing. With all due respect to E. J., he's missing the point: the Republicans don't want to govern, because they don't want anyone to govern our society. They are trying to re-create the Social Darwinist paradise of the late 19th century, and they are getting closer to it every year.

We are running a rather frightening experiment in this country. Modern society grew in tandem with modern government. Institutions across our society became larger, richer, more complex, and better organized, and government had to do the same to be effective and make sure that society functioned on behalf of the average citizen. Thanks to the Republican Party and all it represents, we are now going to find out whether anything resembling modern society can function without a large and effective government, and I feel quite certain the answer is going to be no. The Republicans have already achieved so much that they would be much wiser to stop now, while society still has some stability, but that is not their intention.

One of the many dirty secrets no one wants to discuss in Washington these days is that enormous fortunes destroy democracy. I think that President Obama could make that argument resonate among the American people if he wanted to make it, but he doesn't. He wants slightly higher marginal rates for the highest earners simply to make them "pay their fair share," not because the confiscatory rates of the 1940s and 1950s were key to creating the world in which his grandparents made their lives. And he has ruled out returning to the Clinton tax rates that more than balanced the budget in the late 1990s, just as he ruled out returning to Glass-Steagall. (A recent New York Times business page article indicted that the Dodd-Frank Law will institutionalize derivatives trading, not cut it back. It is too big to fail.) Another issue off the table is the low pay scales of American workers, which continue to get lower. While it is perfectly moral for energy magnates to accumulate tens of billions of dollars, it seems that it is immoral for wage-earners to aspire to anything above the increasingly declining average.

A deal may indeed take two or three weeks to reach, but it will do no great violence to current Republican principles--and it will be whittled away still further in the months to come.

p.s. It is now Monday and we have no deal even in the Senate. Tomorrow we will be over the cliff. A chorus of Republicans, I predict, will immediately announce: "President Obama got just what he wanted: tax increases on everyone in America." I wish he HAD wanted it. Great crises in national life demand shared sacrifice from anyone with resources. But he didn't.


PJ Cats said...

Dear Prof. Kaiser,

on the end of the year, I wish to thank you again for your insightful columns. I still read them every week. As I share most of your views, there is little sense in commenting each time. There is still some objective news out there to support our views, but it is also diminishing. The age of idiot has started, a while ago actually, maybe twenty, thirty years, and it remains to be seen where that leads us. Overhere in Europe it's a little less bad, but still bad enough. Anyhow, we still hang on, I hope you do too, for a long time. Greetings from Holland.

Wes Volkenant said...

Dr. Kaiser - I had the opportunity to put a face and voice to your name this past holiday weekend, as I watched CSPAN 3's airing of a Missouri symposium you participated in, in September, concerning the assassination of President Kennedy. Well done!

After nearly two months' discussion, worry, condemnation, the Fiscal Cliff debate has been resolved. No one, save perhaps VP Biden, came out of this "a winner." This is no way to operate a nation, let alone, this nation. And now as a new Congress is sworn in today, we begin a new seven week battle to the next fiscal/financial calamity, coming by the end of February.

Two sets of principles. No middle ground until some very last second is identified again. And, as this nation experienced throughout the late 19th century, we potyentially face years of this divided government, divided views of government's role, and divided payths to resolutions of our nation's concerns.

As we start 2013, thank you for continuing to provide us these moments of reflection each week!