It sounds like the worst case scenario is that next year no one can agree on cuts so defense takes a big hit, taxes go up, and you get about $600M in other cuts (although they could still be security related). Klein seems to be passing this deal off as a win-win and lose-lose if the panel doesn’t make good recommendations to Congress, but I think the Democrats win no matter what because Social Security and Medicaid have not been put on the chopping block in the automatic cuts.
Thoughts?
Where do you see that taxes will go up under the trigger scenario? All I see is cuts to the discretionary, Medicare, and defense budgets.
My initial response is the Democrats lose under any scenario… That doesn’t necessarily mean that the Republicans win, but the Dems are now just trying to salvage moral victories on the preservation of low-income programs and defense cuts. Their strategy is duck-and-cover.
Anyway, I think the Republicans are saying, “don’t throw me in that briar patch,” about the trigger. Fact is, the defense cuts aren’t as penal as intended to many of them, especially the Tea Party, who have been open to large cuts to the Pentagon. With that said, I wouldn’t be surprised if the super-committee generates a report that increases revenues, à la the Gang of Six proposal. It will never pass the House, though, especially if the Tea Party knows that they will be rewarded with automatic, deep cuts to federal spending. If you look at their rhetoric, they are much more concerned about the size of the administrative state than the redistributive state… I would say this is one of the big differences between the Tea Party and establishment Republicans. (George Bush didn’t mind a large state, but he didn’t like the downward redistribution; the Tea Party seems more concerned about the size and power of the bureaucracy.) Therefore, I would presume that discretionary cuts are worth more to them than entitlement cuts, even when it comes to every Republican’s favorite bureaucracy: the Pentagon.
Democrats have played right into the Br’er Republicans’ hands. It’s a right-wing ideologue’s dream scenario: they are rewarded for intransigence with the dismantling of federal programs.
Tyler:
I think that by January of 2013 you will think of this as the smartest tactical move of Obama’s first term.
The tax increases come from the automatic end to the Bush tax cuts that are assumed to happen in Dec. 2012. That means leading up to the election Obama will hold the biggest trump card of all. That will basically force the super-committee to include revenue increases and concessions on the programs Democrats want to keep. At the end of the day Obama/Congressional Dems will know that they can stop the process and only take less than $400M in cuts they really don’t want; the Republicans will be facing a complete end to the Bush tax rates, $600M in defense cuts, and possibly more cuts to things like Veterans Affairs and Homeland Security.
Jake:
Smart? Tactical? I honestly don’t understand how either applies. The nation’s economy was held hostage by a group of psychotics, and Obama and the Democrats paid the ransom.
Now, the Bush tax cuts are an entirely different matter. I agree that the Democrats have the leverage on that debate — if they play it right, the hostage will become the captor. Of course, that relies on their convincing Republicans that they are willing to let all of the Bush tax cuts expire, which I don’t think they are willing to do at this point.
There’s also a broader point to be made here, which is that hostage-taking is a terrible way to make good policy, regardless of who wins. Unfortunately, it seems to be the only way things can get done anymore.
Tyler:
I agree with the last sentence. But I don’t think it is fair to say the GOP was the only side using brinkmanship in this instance. Brinkmanship only really happens when both sides are playing. I think the best part about this deal is that, as Ezra Klein pointed out, none of the options for the next couple of years involve driving the economy off of a cliff. With the automatic cuts (and automatic tax increases when the Bush cuts expire) you are protected from a calamity like we’ve had the last couple of weeks. Hopefully the super-committee will come together on something reasonable, but I really doubt it.
Jake:
How did the Democrats get one single policy victory out of this deal? Perhaps the averted a full-out routing on some issues, like Medicaid, but they weren’t “playing” anything. It’s not like they were insisting on revenue increases until the very end – they gave that up in the Reid bill a week ago. No, what drove this to the brink was Republican intransigence. I don’t accept any veiled attempt at equivalence between the two parties in this debate. The Democrats accepted a defeat on policy grounds a long time ago to prevent the unthinkable: default and depression. The only issue was whether the cuts drawn up by Republican leadership would be big enough to placate the ideologues in their own caucus.
Plus, while we may have avoided driving off the economic cliff at a 90 degree angle, the severe budget cuts and lack of one single stimulative measure will probably mean only a gentle 65 degree death fall. Hello, 1937!
Tyler:
For what it’s worth, discretionary spending (security and non-security) is going down in 2012 by about $7 billion (less than 1%). I think we can swallow that pill as a nation considering that’s about .007% of the deficit this past year. Assuming the total cuts are $2.4 trillion over the next decade, that’s only about 7-8% of spending over that period. With half of the cuts being defense related, a basic guaranty of revenue increases compared to current revenue, and near assurance that Social Security and Medicaid will not be touched unless both sides are happy, I see a lot of wins for the Democrats in this. There will definitely be program cuts, but the President originally wanted $4 trillion in deficit reduction over ten years (granted some would have been through tax increases). Plus I think spending cuts were/are inevitable. A $1 trillion + deficit is not sustainable, and we do have to start thinking a little about what we will do 2030 forward when we have a bunch of baby boomers for whom we have to care. I’m not a cut, cap, and balance advocate by any stretch of the imagination but I don’t see away around some cuts and I think spreading the cuts out over defense and domestic spending is a good way to start.
This link is to a Democratic Fact Sheet on the proposal (granted it was “obtained” by Fox News), but I think it’s a relatively accurate portrayal of what I’m reading everywhere else and trying to synthesize above.
Jake:
The cuts were back-loaded, for the most part, but that does not mean that they will not have drastic contractionary effects on the U.S. economy. The $7 billion in cuts in 2012 does not include the expiration of emergency unemployment benefits or employee payroll tax break — two life-support measures extended for 12 months during the Bush tax cut deal last December. Those will be painful on the individual level for the jobless and underemployed, and aggregate demand will suffer on the macro level.
It’s no coincidence that the rate of change in GDP and employment is falling at the very moment that stimulus dollars are fading away. (You’ll also notice that the economy experienced its greatest growth when stimulus spending was at its peak.) Businesses have plenty of money with which to hire new workers, but there is not enough demand in the economy to justify it, especially since worker productivity — a good thing, no doubt — has jumped as a result of the recession. Accordingly, the solution should be focus on the demand side, not the supply side.
Intro to Macroeconomics will tell you that there are four sources of GDP: consumer spending by households, private investment from businesses, exports to foreign consumers, and government spending. Households are so weighed down with mortgage debt from the credit binge of the 20-aughts (do we have a good name for that decade yet?) that consumer spending is still a ways off from rebounding. In a sort of self-fulfilling prophecy, businesses won’t make new investment until they feel assured that the economy will recover soon. (Surely coming within an inch of an self-created default didn’t inspire more confidence.) And while consumers abroad are no doubt boosting U.S. exports because the cheap dollar makes our goods more competitive, two of our biggest markets, Europe and Japan, have economic problems that make ours look like a paper cut.
What I’m building up to here is a Keynesian finalé that I would challenge you to refute. Right now, only the government has the means to boost aggregate demand. It is the spender of last resort, and we have surely exhausted all of our other options at this point (the Fed has used every monetary tool it has, and then some…) What’s more, the government has the ability to borrow at record-low interest rates — investors are flocking to treasuries because they are should be the one certain investment in the global economy right now. Ideal policy would be to couple robust deficit-financed infrastructure investments, aid to states, and safety-net spending with a medium-term deficit reduction plan.
That is the standard to which compare the debt ceiling package. The FY 2012 cuts you reference look a lot more severe when scored from the baseline of an ideal level of government spending. But perversely, the part of the economy suffering the greatest net loss of jobs is the public sector – primarily on the state and local levels. This deal withdraws more federal support to states and cities, forcing them to close the gaps through higher taxes (congratulations, Tea Party) and layoffs.
But the deficit reduction debate was dragged so far right, and so far away from good policy, the the Democrats didn’t even try to argue for more stimulus. Let’s remember the deal that Republicans were offered early on: $4 trillion in deficit reduction over 10 years, with $3 in cuts for every $1 in revenue. For the first time in history, a Democratic president offered to raise the Medicare eligibility age and cut precious discretionary programs, all in exchange for the closing of loopholes that everyone, Republican or Democrat, can agree are bad policy. It wouldn’t have done much about unemployment, but U.S.’s AAA credit rating would have been preserved, the short-term fiscal problems (if there is such a thing) would have been solved, and the political system would have been redeemed. But no, President Obama would have received too much credit for brokering the “grand bargain,” and therefore it was unpalatable to his sworn enemies (see: Mitch McConnell, “our first priority is to make Obama a one-term president”).
In closing, I don’t usually mind the ugliness of the sausage-making process, because normally the system prevails and produces a decent, if unsatisfying, compromise. This time, the system failed, and the outcome was as ugly as the process that produced it. Beyond that, it sets a terrifying precedent for policymaking: loaded-gun negotiating. I believe that our republic is resilient enough to overcome the current political and economic crises, but there will be a lot of self-inflicted pain in the meantime.
Tyler:
Three quick responses:
1) I think you are not considering the fact that the budget is already inflamed from the recession, so presumably we are operating under heightened spending levels.
2) The cuts are all delayed to where there is no immediate impact.
3) I think we can both agree that this problem is made particularly unique because of the large deficits we had during the boom years, which is what I call the 20-aughts.
This was a good conversation, it reminded me of this:
Jake
Tyler
