Now's the time for more precision in the language used to describe the sorry state of affairs we're facing. The deal cut by the Obama administration and the Republican leadership is not really the "Bush tax cuts" anymore. Obama and the GOP own this one. And it spells trouble any way you look at it.
The Bush tax cuts were first enacted in 2001, back when the Treasury was sitting on the Clinton surplus--you remember that, back in the late 1990s, a government surplus. I know, you've not heard that phrase in a while. The logic for the Bush tax cuts was that this was the people's money, the government had collected too much and it should be returned to the people. This was arguable logic with a shred of reason behind it. It contrasted with the competing idea for how to manage the national finances: given the size of the national debt at the time, keeping the surplus and using some of it to pay down the debt.
Of course, that was before 9/11 and the futile hunt for al-Qaida in Afghanistan. By 2003, the Bush administration proposed more tax cuts, because that's just the way they rolled; even though Bush had spent the surplus, it didn't matter that the conditions that were the rationale for the tax cuts no longer existed. Compounding this was the the really foolish ($3+trillion of foolishness)--and arguably illegal--attack on Iraq. Despite the mounting debts of those unfunded, hugely expensive adventures, the tax cutting mania continued. You know how all that turned out. By 2007-08 the housing bubble was deflating, mortgage defaults and foreclosures followed, the economy shrunk, millions lost their jobs. And of course the banking system was teetering on collapse along with the auto industry. The government stepped in to rescue the financial system and the 2 million or so jobs in the auto-industry and allied sectors. These were necessary and successful uses of government loans. But notice that the investment bankers are back to their profligate ways, and those million-dollar bonus babies are among those benefiting disproportionately from the tax-cut bonanza of the Obama/GOP deal. And it's those damn social security teat-suckers and lazy unemployment collectors who are destroying our economy?
The Republican leadership in Congress has maintained the Bush mantra of "tax cuts" to address any problem. It doesn't matter to them, regardless of what they say, that the lost revenue has created higher and higher debt. Bear in mind that some tax cuts are wise economic policy, but the GOP doesn't really like those tax cuts; they like the kind that goes to the top of the income scale, because that's where all the big contributors are.
The situation we face now is altogether different from the one in which the Bush tax cuts were launched. We have a tanked economy; now pretty close to flat-line. Millions are still unemployed. The economy desperately needs demand. The government has only so many tools available to provide demand. However, the huge tax cuts for the top income earners has none of this stimulative effect. It is simply tax cutting as an ideological jerk of the GOP knee. But it has a major downside and a multiplier effect. The loss of income tax revenue and of estate tax revenue is a blow to the operating budget, and the payroll tax "holiday" is a cut to Social Security trust fund revenue; the lion's share of the deal is a strategic defunding of the government. There are two options to address this:
- borrow more--higher deficits; ever increasing debt (which requires more of the budget to go to interest payments on debt service);
- cut spending--drastically, and at a time when government investment in infrastructure and R & D are desperately needed to stimulate the economy.
You know where this is heading: the Obama/GOP deal on tax cuts is a Grover Norquist wet dream. Unable to achieve the shrinking of goverment by simply reducing government, the GOP adopted a strategy in the other direction--expand government to the size that makes it unsustainable. President Obama has accommodated them. With drastically reduced revenues, the government will have no means to stimulate the economy so the the loss of revenue will by multiplied, creating an upward spiral of deficits, which will be addressed by slash and burn policy of spending cuts. This will catastrophically drive the economy off the cliff.
So let's make sure we call this what it is: the end of the Great American Century