The post-election negotiations over the misnamed “fiscal cliff” (which I discussed in my most recent Verdict column) continue to keep the country on a rollercoaster ride. As I write this column, the latest news is that House Speaker John Boehner, who represents the Republicans in negotiations with the White House, has rejected President Obama’s most recent proposal, apparently because it is still too hard on the economic elite in this country.
In such a fast-developing story, all of this could change in a matter of minutes. It is possible, for example, that Boehner is (as some have speculated) almost ready to agree to the deal, but he is trying to squeeze a few last drops out of the turnip—and, not incidentally, convince the most extreme members of his (generally quite extreme) party that he really did his best to impose the most pain possible upon the President.
Even if this is all a matter of posturing and gaining an advantage in the negotiations (now, and in the remainder of Mr. Obama’s presidency), it is still worthwhile to take a moment to look at what the President has already offered, and what the Republicans still find unacceptable. Moreover, it is worth thinking about the Republicans’ stated plans to continue to use the debt ceiling as a negotiating tool, and Obama’s weak attempt to neutralize that strategy.
The bottom line is that President Obama has already revealed himself to be unchanged by the election, and by the last two years of stonewalling by the Republicans. He still appears to believe, at best, in a milder version of orthodox Republican fiscal conservatism—an approach that would be a fitting starting position for a right-wing politician in negotiations with an actual Democrat. Moreover, he still seems to believe that the Republicans are willing to negotiate in good faith.
Again, the situation is still developing and could soon change in a way that validates the White House’s basic negotiating strategy. At this point, however, we can at least say that a “win” for the White House is nothing more than a less bad version of what Republicans want, rather than movement in a better direction. It certainly does not validate the hope among the President’s progressive supporters that he had moved away from his evident timidity and his apparent comfort with the Republicans’ framing of the issues.
The Now-Familiar Budgetary Deadlines, and the Part the White House Played in Getting Us Here
Coming out of the election, both parties in Washington faced an unusually difficult and complicated set of legislative challenges regarding the budget. Because of Republicans’ intransigence on both taxes and spending, and President Obama’s refusal to act as if he even perceived the depth of that intransigence, the country’s taxing and spending laws are now in an unprecedented state of uncertainty.
Regarding taxes, December 31st of this year is the date on which the Bush/Obama tax cuts are set to expire. I refer to them as the “Bush/Obama tax cuts,” rather than the more common “Bush tax cuts,” because President Obama had the opportunity two years ago to allow those tax cuts (which overwhelmingly favor the wealthy) to expire, and yet he agreed to renew all of the tax cuts for two more years.
At that time, President Obama claimed that he would fiercely battle to make sure that only the tax cuts for couples making less than $250,000 per year ($200,000 for singles) would be extended after 2012. Coming out of a rousing election victory, he began negotiations this Fall by saying that he would not compromise on that core commitment.
Meanwhile, because of Obama’s misplaying of the debt ceiling negotiations in Summer 2011, the so-called sequester—involving automatic spending cuts of equal sizes on both defense and nondefense items—is also set by law to begin on January 1, 2013. These cuts will be in addition to domestic-side spending cuts to which the White House has agreed over the last two years, making the idea that the cuts are “balanced” between defense and nondefense spending a matter of very selective memory. The truth is that defense spending has been—as always—heavily favored.
In addition, the federal government is also currently running not on a regular annual budget, but instead on a “continuing resolution” that is set to expire on March 27, 2013, rather than running through the end of the fiscal year on September 30, 2013. Unable to generate even the most basic annual budget document during an election season, both parties in Congress sent a bill to the White House that simply extended the poorly thought-out priorities from the previous year’s messy budget process for another six months.
Finally, of course, there is the debt ceiling. With a surge of panic-related taxes currently being paid by wealthy Republicans (who are arranging to pay taxes now, in fear of paying higher taxes later), it is unclear exactly when the debt ceiling will formally be reached. That should, however, happen any day now. We do know, in any event, that the Treasury Department’s “extraordinary measures”—which have now become quite ordinary and necessary to keep the government from defaulting on its obligations in the face of Republicans’ refusal to raise the debt ceiling—will only carry the government through about two more months of normal operations.
While all of this is happening, the temporary reduction in payroll taxes for all workers is also set to run out at the end of the year. Meanwhile, the extension of federal unemployment benefits will also end soon, absent further action by Congress.
With all of this coming to a boil at the same time, it is no wonder that the term “fiscal cliff” took hold in the public imagination. Even so, as I argued in my most recent Verdict column, the overall economic consequences of all of these changes will be modest and reversible.
What is more remarkable is the White House’s political response to the situation—a situation that, again, its own political naiveté played no small part in creating—both in terms of what it is offering now, and how it is failing to prepare for the next round of hostage-taking by the Republicans.
What Boehner Rejected: The White House Again Compromised With Itself, and Then Saw the Republicans Laugh in the President’s Face
Earlier this week, the White House reportedly sent Speaker Boehner a proposal to break the budget deadlock. Because the proposal never became law (or even a formally proposed bill), the complete details of that proposal are unknown. We do know, however, the broad contours of what was being proposed.
Amazingly, the President had moved his unmovable line—marking the income levels at which higher tax rates would take effect—up by more than half, from $250,000 for a couple up to $400,000. This is especially remarkable, in light of two little-appreciated facts about the $250,000 number itself. First, that number emerged during the 2008 presidential primaries, as part of a back-and-forth rhetorical duel between then-candidate Obama and then-candidate Hillary Rodham Clinton, when the Obama and Clinton camps ended up moving the arbitrary line up from early proposals in the range of $150,000.
There is, in fact, nothing economically meaningful about the $250,000 cutoff (or about alternative cutoffs of $150,000 or $400,000, for that matter). The fact that $250,000 was the point roughly separating the top 2% of earners from the rest of us was pure happenstance, but it does indicate just how absurd it is to think of the people who make somewhat less than $250,000 per year as “just regular folks.” It is true that there are regional differences, of course, but even in New York City and Los Angeles there are plenty of people who are not living on anything approaching $100,000 per year, much less $250,000.
In other words, we arrived at the magic cutoff point through an arbitrary process by which two very economically centrist Democratic politicians one-upped each other to protect higher and higher income earners from even one dollar of tax increases (even as we do nothing about reducing the number of children living in poverty below its scandalous level of 21%, in this very wealthy country).
The second little-known fact about the $250,000 income cutoff for even the smallest tax increase is that it is not based on what normal people think of as their income. Obama’s tax proposal would begin to collect more taxes from people whose adjusted gross incomes exceed $250,000. (Actually, because the Obama proposal is keyed to inflation, his $250,000 line in the sand in 2008 is now about $267,000, which is reflected in his proposed legislation.)
What is the difference between plain old salaries and wages, on one hand, and adjusted gross income (AGI) on the other? There are many excruciating details, but the important point for readers to take away is that AGI is almost always much lower than one’s salary. For example, my salary (which, I should add, is already below Obama’s cutoff) is more than one-third higher than my AGI, because of a combination of tax favors that Congress has added to the tax code over the years. It is generally the case that almost all married taxpayers who would say that they “make about $300,000 a year” would actually fall below $250,000 in AGI.
Even so, that was not the only giveaway to wealthier taxpayers contained in the proposal that Boehner rejected. Whereas President Obama had originally planned to allow dividends to be taxed as regular income, at whatever tax rate a taxpayer otherwise would be required to pay, the new proposal reportedly cut that to 20%—an increase from the absurdly low 15% of the Bush years, but still half the rate that would have been required of wealthy taxpayers under Obama’s original plan. Given that this preferential rate is part of the “Buffett problem”—whereby people who receive huge sums of money not from working, but rather from owning financial assets, end up paying lower rates than people with quite modest incomes—this is quite a concession by the White House.
Although there are many other aspects of the Obama “compromise” that are notable, I will limit myself here to one further surprising giveaway by the White House. After months of hearing the Obama team say—quite correctly—that Social Security is not a part of any long-term deficit problems that might one day need to be addressed, their latest proposal adopted a method of measuring inflation to adjust Social Security benefits (and many other federal benefits and taxes) that would reduce benefits in the future.
This concession to Republicans’ insistence that spending on “entitlements” be cut right away was especially surprising, because there is evidence that senior citizens actually face higher price increases than are reflected in the current inflation measure, not lower price increases.
Yet all of these concessions were not enough for Mr. Boehner. As much as the White House tried to give in to Republicans on issue after issue—even after an election in which the President ran explicitly on these very issues, winning a surprisingly comfortable victory—the Republicans (at least to this point) are willing to save President Obama from his own worst instincts to give away what his supporters care about most.
This is, in fact, a replay of the “grand compromise” fiasco that preceded the debt ceiling showdown in the summer of 2011. Then, the White House offered even larger cuts in the social safety net that Democrats have fought for years to protect—only to have Boehner and his party walk away.
Perhaps more to the point, the White House’s broader spending proposals are so constrained that, as Eduardo Porter pointed out in an economic commentary in yesterday’s New York Times Business Section, it would reduce the federal government’s spending on items other than defense and those related to aging and health care to levels not seen since the Eisenhower Administration in the 1950’s. Support for sending worthy middle-class students to college, for spending on the Centers for Disease Control, for national parks, and so on, will all be cut disastrously (or even eliminated entirely).
At most, therefore, the Obama plan represents a complete capitulation to the Republicans’ long-term goals regarding government spending. Once one adds in the concessions that the White House shockingly offered this week, the newly-reelected Democratic President looks like a caretaker who is merely trying to tap the brakes as the Republicans continue to take and take from the rest of the country, in order to allow the wealthiest Americans to continue to solidify and expand their gains over the last thirty years.
The Big Issue That the White House Will Not Confront: The Republicans Are Treating Every Negotiation as Another Opportunity to Cut Spending, Not Solve Problems
The larger issue, however, is the most worrisome of all. The Obama team has still not confronted a simple fact: The Republicans no longer have any desire to make the budgeting process work rationally. It is the Republicans’ clear and stated plan to use every lever possible to wage anew every battle in which they did not win what they hoped to win on the first go-round.
The most obvious example of this strategy is the debt ceiling. As everyone should know by now, the Republicans took a law that had always been a non-binding symbolic statement of faux fiscal probity, and they have turned it into a weapon by which they re-open budgets that they have already passed. Doing so allows them to hold the economy hostage, agreeing to bend only when the Democrats agree to cut still more from a budget on which the President already compromised.
How did the President try to address the debt ceiling this time around? First, he had his press secretary announce that the White House will not rely on the 14th Amendment to argue that the debt ceiling is unconstitutional. Second, he has ignored the other argument that leads to the conclusion that the debt ceiling is unconstitutional on separation-of-powers grounds. (Professor Michael Dorf and I have been active in developing and promoting that argument.)
Third, the President offered to “kick the can down the road” (in the overused phrase so favored in Washington) by simply having the debt ceiling raised enough to allow the government to operate for another two years. Given that an incumbent President’s party almost always loses seats in a mid-term election, it is difficult to see why the White House thinks it is better to wait until December 2014 to revisit this issue, rather than permanently nullify it now.
Politics may be the “art of the possible,” in Bismarck’s famous description, but the American people can be forgiven if they wonder whether this is really all that is possible, right now, from a President who was supposedly energized and strengthened by his re-election.
We cannot forget that the ultimate problem is the truly crazy turn that the Republican Party has taken in the last generation. Even so, without John Boehner there to bail him out, Barack Obama would long since have pushed this country in the direction of greater income inequality, and less compassion for the poor and for those who might ever need help in their old age (that is, nearly everyone). That was supposed to be the poisonous legacy of the Reagan and Bush years that this President would finally begin to turn back. Maybe next time.