Viewed in isolation, the terms of the Fiscal Cliff/Curb "Deal", on balance, should make progressives happy. Paul Krugman explains why:
Obama wasn’t going to let all the Bush tax cuts go away in any case; only the high-end cuts were on the table. Getting all of those ended would have yielded something like $800 billion; he actually got around $600 billion. How big a difference does that make?However, this "victory" is the textbook definition of a Pyrrhic victory. Obama has secured short-term success, but by making the tax cuts for incomes below $450,000 permanent, Obama has made sacrifices that will put progressives in a significanly weaker strategic position long-term.
Well, the CBO estimates cumulative potential GDP over the next decade at $208 trillion.So the difference between what Obama got and what he arguably should have gotten is around 0.1 percent of potential GDP. That’s not crucial, to say the least.
And on the principle of the thing, you could say that Democrats held their ground on the essentials — no cuts in benefits — while Republicans have just voted for a tax increase for the first time in decades.
Follow me below the squiggle.
In order to evaluate The Deal, you have to understand the goals and strategies of both political parties. The Democrats/progressives' goal is to, at a minimum, preserve and strengthen the New Deal, but also ideally to expand the New Deal to include things like Universal Healthcare.
The Republicans want to undo the New Deal. About 30 years ago, the Republicans developed a strategy to accomplish this, the strategy is known as Starve the Beast. Essentially, Republicans want to reduce tax rates in order to reduce the amount of money the Government has to spend. The consequence of any reduction in tax rates is that deficits increase; over time the Government builds up a very large public debt. This is exactly what has been happening for the last 30 years. The national debt doubled in the 8 years under President Bush from about $6 trillion to about $12 trillion.
The starve the beast strategy has a two-pronged benefit for Republicans. (1) Whenever Democrats want to propose a new program, Republicans can oppose it by saying "we don't have enough money and we can't afford it;" and (2) Increased deficits allow Republicans to attack existing programs as well. By saying "we need to cut spending to reduce deficits," Republicans can make effective arguments that we need to cut back or eliminate these programs altogether in order to be "fiscally responsible" and cut the deficit.
We have already seen the Starve the Beast strategy at work during the recent fiscal debates, and it has nearly succeed each time. Republicans successfully used the debt and deficit to get Obama to offer cuts to Social Security (chained CPI) and Medicare (raising the retirement age from 65 to 67). Fortunately for progressives, many of the House Republicans aren't operating as perfect Strategic Actors in these negotiations, and they didn't know a great deal was staring them right in the face.
The reason the Starve the Beast strategy is so effective is that it forces Democrats to make the cuts. This has the dual benefit of allowing Republicans to later criticize the Democrats for cutting popular programs (as Romney did in 2012), and it is easier for the public to accept a Democrat cutting an entitlement program than a Republican. This is because polls show the public trusts Dems more on handling entitlements (this is the "only Nixon could go to China" philosophy -- only a Democrat can destroy the New Deal.) The public figures that if the Democrats are making the cuts, the cuts must really be necessary because otherwise they wouldn't do it.
The tax rates that Bill Clinton enacted is the last level of taxation this Country had with a surplus. So, what did Republicans do when they took control in 2001? Cut taxes, twice. However, due to procedural reasons, they couldn't make the tax cut permanent, they could only make them effective for 10 years.
This brings me to the reason why The Deal is bad. First, you have to forget about the argument that Republicans just voted for a tax increase. That is a fallacy. If nobody did anything, taxes were going to return to Clinton era rates. Thus, a vote to extend any of the tax cuts is equivolent to a vote to cut those taxes from the Clinton-era rates to the Bush-era rates. This is a tax cut, pure and simple.
In order to spin this as a victory, Obama and his supporters are framing the Deal in terms of how much revenue Obama was able to get the Republicans to concede to him in terms of the increased rates on the wealthiest Americans. But this is the wrong frame, because those rates are going up anyway, so that revenue was going to be available regardless.
The proper frame of reference for what just happened is that Obama just enacted a tax-cut on all incomes up to $450,000. I do not suggest that there is anything wrong with this per se, but in order to evaluate this new policy in the context of each parties long-term strategic objectives, we have to understand the proper frame of reference.
So, given what I earlier explained about the Republicans' "Starve the Beast" strategy, does anybody have any doubt that a permanent tax-cut on all incomes up to $450,000 is anything but a major strategic victory for Republicans?
You can argue that given the current economic situation, if taxes went up on poor and middle class families, the economy would go deeper into recession, so the tax cuts were necessary. That is a sound argument; however, that is an argument for simply extending the tax cuts, not making them permanent. I would like to have seen Obama simply extend the tax cuts another two years. Then, if the economy had recovered, he could let the rates expire and we could go back to the Clinton-era rates on everyone. If the economy hadn't recovered, just extend the tax rates for another two years.
By making the tax cuts permanent, Obama has conceded a significant amount of ground in terms of lost revenue to the Republicans, revenue that can only be recovered by Congress passing new legislation to increase taxes back to Clinton-era rates. Not a single Republican has voted for any tax increase in over 20 years. Therefore, for any hope of returning to the Clinton-era tax rates, the Democrats would have to (1) control the Presidency; (2) control the House of Representatives; and (3) control the Senate with either a filibuster-proof majority or reform the filibuster; and the Democrats would have to take the political hit of voting for tax increase, unlike the current situation where the taxes go up on their own.
Any future debate on a budget is going to be framed in terms of it increases revenue by $X trillion and decreases spending by $Y trillion. Progressives would be in a much better bargaining position if we had the increased revenue from the Clinton-era tax rates, or at least the potential revenue in terms of a tax cut that would expire at some point in the future.
Obama secured some nice provisions in the bill like UI extensions and the various tax credit extensions, but many of them are temporary and will have to be fought over again when they expire. More importantly, they are peanuts compared to the permanent reduction in income tax revenue Obama handed the GOP.