A Grand, no good, very bad Bargain

Paul Krugman is only one of the voices today saying President Obama should call Republican’s bluff on any Grand Bargain.

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.

So what should he do? Just say no, and go over the cliff if necessary.

It’s worth pointing out that the fiscal cliff isn’t really a cliff. It’s not like the debt-ceiling confrontation, where terrible things might well have happened right away if the deadline had been missed. This time, nothing very bad will happen to the economy if agreement isn’t reached until a few weeks or even a few months into 2013. So there’s time to bargain.

More important, however, is the point that a stalemate would hurt Republican backers, corporate donors in particular, every bit as much as it hurt the rest of the country. As the risk of severe economic damage grew, Republicans would face intense pressure to cut a deal after all.

All true, although Obama hasn’t exactly listened to folk like Krugman in the past. The offered Republican side of this Grand Bargain is entirely a game of smoke and mirrors:

The basic contours of this legislative white whale were simple enough: cuts for revenue. Democrats would sign off on Medicare and Social Security cuts if Republicans would sign off on increased tax revenue. There was just one problem. Republicans would not sign off on increased tax revenue. But wait — didn’t John Boehner offer Obama $800 billion of new revenue? Not really. As Matt Bai of the New York Timesreported, most of this “new revenue” was of the mythical variety. Boehner wanted to cut tax rates and tax loopholes so the latter would pay for the former. The new revenue was supposed to come from the allegedly higher growth this kind of tax reform would unleash. In other words, the Laffer curve.

Fast forward to today. The old gang is back together again in Washington and so is the debt ceiling, which we’ll probably hit some time in January. Boehner is once again saying he’s open to “new revenue” — if new revenue means lower taxes. Boehner still wants lower rates and a broader base, with any additional revenue coming as “a by-product of a growing economy.” Of course, as Matthew Slaughter, the Associate Dean for Faculty at the Tuck School of Business at Dartmouth, told me, the empirical evidence for this is pretty sketchy in general, and, more specifically, nobody thinks we’re on the wrong side of the Laffer curve now.

But Obama seems determined to do a deal anyway, to prove he can get something done in the face of Republican hostage-taking. His campaign end pitch and his first statements of the post-election phase have all reinforced that. No matter how much sense Krugman may be making, Obama’s going to ignore him this time too.

Still, far more worrying for me is that even folks like Krugman don’t seem to be considering that any deal at all is based on throwing the most disadvantaged Americans off the cliff so the rest of us don’t have to fall. And no-where in the Beltway wisdom will you find any serious consideration that substantial cuts should be made to America’s bloated military-industrial complex before we even consider throwing the poorest over the cliff. That’s just not a “serious” suggestion.

Welcome to your Democratic Party, the folks progressives and lefties are told they must support come what may lest the evil Republicans…ummmm…throw poor people off a fiscal cliff so we can keep the Bush tax cuts and a military that excels at killing brown people. Meh.

Bonus read: Travis Waldron at Think Progress writes that “Despite Republican Claims, America’s Entitlement Programs Are Already ‘Secure’“. So why are cuts to Social Security and Medicare already on the table as Obama’s opening negotiating position, huh?

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Steve Hynd

Most recently I was Editor in Chief of The Agonist from Feb 2012 to Feb 2013. My blogging began at Newshoggers and I’ve had the immense pleasure of working with some great writers there and around the web ever since, including at Crooks & Liars. I'm a late 40′s, Scottish ex-pat, now married to a wonderful Texan, with Honours in Philosophy from Univ. of Stirling, UK 1986. I worked most of life in business insurance industry (fire, accident, liability) including 12 years as a broker/underwriter/correspondent at Lloyd’s of London. Being from the other side of the pond, my political interests tend to focus on how US foreign policy affects the rest of the planet. Other interests include early and dark-ages British history, literature and cognitive philosophy/science.

3 CommentsLeave a comment

  • It’s worth noting, I think, that when the Republican Congress shut down government when Clinton was in office… Well everybody knows who Clinton is today, but how many can name the members of Congress involved in that fiasco? I’m not actually a Krugman acolyte (sometimes agree, less often think he’s nuts), but he makes a good point here.

  • The coming debt battle

    Citing a phony “crisis,” the GOP wants to gut Medicare, Medicaid and Social Security. Democrats can’t let them

    Salon.com, By James K. Galbraith, November 8

    In the tense run-up to Hurricane Sandy, I clicked on one of those headlines that appears on the right side of the screen: “Civilization May Not Survive This, Economist Says.”

    Once there, I knew I’d been had. It was about … the public debt. It cited one Lawrence Kotlikoff of Boston University, one of America’s most talented artificers, who “estimates the true fiscal gap is $211 trillion when unfunded entitlements like Social Security and Medicare are included.” Compared to that, what’s a thousand mile-wide hurricane?

    That the looming debt and deficit crisis is fake is something that, by now, even the most dim member of Congress must know. The combination of hysterical rhetoric, small armies of lobbyists and pundits, and the proliferation of billionaire-backed front groups with names like the “Committee for a Responsible Federal Budget” is not a novelty in Washington. It happens whenever Big Money wants something badly enough.

    Big Money has been gunning for Social Security, Medicare and Medicaid for decades – since the beginning of Social Security in 1935. The motives are partly financial: As one scholar once put it to me, the payroll tax is the “Mississippi of cash flows.” Anything that diverts part of it into private funds and insurance premiums is a meal ticket for the elite of the predator state.

    Via Hullabaloo: Fiscal Cliff notes

  • Well…, I believe that Obama is listening to Krugman on this issue…, and listening to Simon Johnson over at Bill Moyers. I said over at Mauberly’s site before the election that I think we will see a different Obama this term. This issue will be a very telling test of whether that proves true or not.


    In truth, President Obama now has a great opportunity to both help the economy and greatly mend our budget. How is this possible, given that the Democrats control the Senate (narrowly) but obviously not the House? The key point is that the Bush-era tax cuts expire at the end of this year – unless the House, Senate and President all agree to extend them. In effect, President Obama can veto that extension – irrespective of what John Boehner says or does.

    The immediate effect on the economy of the full repeal of the Bush cuts would be more dramatic than the administration wants – and the president campaigned against rising taxes on the middle class. But once he has vetoed Bush cuts, President Obama can immediately propose a new set of tax cuts – the Obama tax cuts – to Congress. These would cut taxes for lower income Americans, for example by lowering payroll taxes (which should also encourage job creation). Would the House Republicans really vote against a tax cut for 100 million Americans?

    The Quillayute Cowboy

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