What Did You Learn From the Cliff Debate, Dorothy? (And the most important question in today’s politics.)

January 2nd, 2013 at 1:25 pm

Well, I’m glad that’s over.

Now that the House has passed the Senate compromise bill, the full spate of tax increases and spending cuts that went into effect yesterday will be shut off (though the sequester was just suspended for a couple of months).  Still, I don’t mean to be a downer, but any relief you feel should be analogized to how much better you feel when you stop banging a hammer on your head.  We’ve avoided, for the moment, a self-made trap.  Now, of course, we’re on to the next one—the debt ceiling, which really is a cliff in that to go over it (can you “go over” a ceiling?) is to default.

The resolution of the fiscal cliff was much as I and others predicted—a very short trip over the cliff—more of a bungee jump, really.  As we said, once House R’s could label a vote for the compromise a net tax cut, enough of them could vote for it.  In fact, one of their leaders, Dave Camp (R-MI) sold the measure to his caucus as the “largest tax cut in American history.”

So, did we learn anything from the episode in reckless governing?  Here’s my list, but these are more things we already knew than things we learned:

–It’s become a cliché to observe the dysfunctionality of our political system.  The problem—which has existential implications—is that the system cannot diagnose, prescribe, and thus it cannot self-correct.  To the contrary, it is becoming increasingly efficient at inflicting wounds.  The most important question in politics right now is: how did Congress become the biggest threat to the economy and what can be done about it?  I actually have a pragmatic, actionable answer to that….read on.

Republicans don’t care about deficit reduction.  They care about protecting the wealthy (I told you this is stuff we knew) which worsens the deficit.  Their talking points suggest they want to cut spending, reduce entitlement s and shrink government, but for the most part—there are notable exceptions*—they don’t have actual proposals to do so.

They worked hard in this debate, and with some success, to shield the wealthy from higher tax liabilities, while never uttering a peep about the expiration of the payroll tax cut, which only bumped up paychecks below $110,000, and thus meant nothing to their funders.  But they managed to raise the threshold on the income tax rate increase to $450,000 (from $250,000) and to ensure that the estate tax would only hit the top 0.2% of estates, instead of the top 0.3% (!) that the D’s were seeking.

This is a predictable outcome of a political system with no effective firewalls between big money and politics.  And while I and others have understandably raised eyebrows about the relatively light revenue number in the bill ($600 billion in new tax revenue over 10 years), when you think about it that light, you’ve got to the give the President (and VP!) a lot of credit for pushing as hard as they did.  It’s true the public was very much with them, but the sad truth is that all American politicians must pay attention to big money.

*One exception is the desire by some to move to Ryan-style premium support for Medicare, which may be specific but is a) politically implausible and b) a cost-shifter, not saver.

The fiscal debate has killed the economic debate.  Economists traditionally worry about “crowding-out”—when government borrowing sucks up too much private capital, leads to higher interest rates, and crowds out more productive private borrowing.  That hasn’t happened.  Instead, there’s been a different type of crowding out that has been far more damaging to the economy.

Mindless debt and deficit hysteria—driven neither by the numbers nor the real fiscal pressures but by ideology to shrink government by reducing its safety net and social insurance functions—has crowded out Keynesian policies to offset the near term demand shortfall and investment policies to offset the failure of the market to make adequate investments in public goods, R&D, education, and the economic mobility of the least advantaged.

This may be a slightly pessimistic way of putting it, but not by much.  The President and his team understand the need to offset the current output gap (as does the Federal Reserve), invest in public goods, and plot a course toward debt stabilization when a bona fide recovery kicks in.  But, to put it mildly, they have had trouble breaking through.  And one can certainly and fairly question whether they try hard enough.

Interestingly, the administration has a chance to make a real difference in this area while at the same time dealing with the Congressional threat noted above: do not negotiate with the Republicans on the debt ceiling.

It is unthinkable that the nation should, in weeks, be put through another crazy fiscal debate, this one with even higher stakes.  It is even more unthinkable to allow a group of renegades to force national default in order to get a dollar of spending cuts for each dollar increase in the ceiling (and again, beyond sweeping calls for reducing caps of non-defense spending, something we’ve already pushed too far, they don’t have a plan here either).

The debt ceiling seems like an insurmountable problem, but I’m reminded of what the noted philosopher Donny Rumsfeld used to say in such cases: “if you can’t solve a problem, make it bigger.”  This isn’t just a debt ceiling debate.  It’s a chance to shut down a dynamic wherein Congress (i.e., Congressional Republicans) doesn’t solve economic problems, it creates them.

By over-riding them, blowing past them, ignoring them as irrelevant, and refusing to negotiate on the basis of the chief executive’s Constitutional responsibility to maintain the nation’s creditworthiness, the President can deal a fatal blow to these dangerous obstructionists.  To do so would not only make a big positive difference to today’s politics and economy.  It would be a precious gift to posterity.

 

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18 comments in reply to "What Did You Learn From the Cliff Debate, Dorothy? (And the most important question in today’s politics.)"

  1. Ken Houghton says:

    do not negotiate with the Republicans on the debt ceiling.”

    Good call, but you’ve worked with the Biden Administration. Do you really think they are smart enough to follow your advice?


  2. R. Nemo says:

    Now we move on to see if Obama holds steady or folds.

    Just a note: I am new to blogging and I fear that reading comprehension levels are not too high in America! If you leave a post on say the Huffpost–people respond as if you said one thing two ways? Very strange.

    To a New Year–god help us!


  3. Peter K. says:

    This will be Obama’s legacy.


  4. Fred Donaldson says:

    This was the best blog I have read in years, anywhere. History proves there are good ideas and bad ideas, good folks and bad folks, inspired and misguided, so the answer is not always compromising principles to gain momentary praise from our peers or relief from the criticisms of others.


  5. Academic Economists React: Shortfalls of Fiscal Cliff Deal - Real Time Economics - WSJ says:

    [...] –The fiscal debate has killed the economic debate. Economists traditionally worry about “crowding-out”—when government borrowing sucks up too much private capital, leads to higher interest rates, and crowds out more productive private borrowing. That hasn’t happened. Instead, there’s been a different type of crowding out that has been far more damaging to the economy. Mindless debt and deficit hysteria—driven neither by the numbers nor the real fiscal pressures but by ideology to shrink government by reducing its safety net and social insurance functions—has crowded out Keynesian policies to offset the near term demand shortfall and investment policies to offset the failure of the market to make adequate investments in public goods, R&D, education, and the economic mobility of the least advantaged. –Jared Bernstein, Center on Budget and Policy Priorities [...]


  6. Academic Economists React: Shortfalls of Fiscal Cliff Deal | Higher Education Programs says:

    [...] –The fiscal debate has killed the economic debate. Economists traditionally worry about “crowding-out”—when government borrowing sucks up too much private capital, leads to higher interest rates, and crowds out more productive private borrowing. That hasn’t happened. Instead, there’s been a different type of crowding out that has been far more damaging to the economy. Mindless debt and deficit hysteria—driven neither by the numbers nor the real fiscal pressures but by ideology to shrink government by reducing its safety net and social insurance functions—has crowded out Keynesian policies to offset the near term demand shortfall and investment policies to offset the failure of the market to make adequate investments in public goods, RD, education, and the economic mobility of the least advantaged. –Jared Bernstein, Center on Budget and Policy Priorities [...]


  7. Ben Vernia says:

    If, by “blowing past” the obstructionists, you mean either exercising the platinum coin option, or invoking the Fourteenth Amendment, I disagree. Doing so would only give some credence to right wing arguments that the Administration is acting unconstitutionally.

    It would be better to select GOP districts and states for selective reduction of federal funds. I am not aware of any legal requirement that the President let the impact of hitting the debt ceiling fall evenly on the country, and there is no moral reason to do so, when GOP-dominated districts are to blame for the problem. To paraphrase Sherman, “Make GOP districts howl.”


    • purple says:

      The problem with all red-state scolding (in terms of tax flows, etc.), is that red states are not a uniform bloc. The African-American population in red states is frequently larger by percentage than in blue states. Compare California to the Old Dixie bloc.

      You can punish red states, but all that will happen is the poor and historically marginalized in those states will be devastated.


    • urban legend says:

      “Acting unconstitutionally” to save the country in a national emergency by executing laws passed by Congress (in accordance with his duties under the Constitution!)!

      Is the House going to impeach him on that basis — that he should have allowed the United States of America to become a deadbeat nation and shut down the government at great danger to the public? When there’s a Democratic Senate to try the charges? Who would have standing to sue in court? Congress passing some form of resolution (with a Democratic Senate)? Individuals in Congress? Grover Norquist?


  8. John T says:

    Strange how you don’t hear from Grover Norquist when the tax increases are on the poor and middle class. This whole deal is a bad idea: austerity when stimulus spending is needed. Nothing, as far as I can see, to address the national shame which is disastrous unemployment.


  9. readerOfTeaLeaves says:

    Many of the GOP House and Senate members who subscribe to the ‘no new taxes’ ideology appear to be from US regions that are in the lower-quartile economically.

    If I go to the Wikipedia page for “US states by *median income”, I note that the lower-income regions highly correlate with GOP Congressional members:
    http://en.wikipedia.org/wiki/List_of_U.S._states_by_median_income

    This suggests that if the President ‘negotiates’ on the debt ceiling, he’ll be engaging in a process whereby the Congressional members from districts with the worst track records on economic policy, educational achievement, and economic performance call the shots. They are probably nice people; nevertheless, their track record does not engenders confidence in their ability to design tax or economic policies.

    If the President allows people of very questionable qualifications to drive this process — almost guaranteeing that it will remains rigidly ideological, rather than fact-based — then my Left Coast state can fund outstanding educational institutions, and the people that I know can work ourselves to death and innovate until we are all blue in the face — but our tax policies will be held hostage by GOP Congressmen determined to protect ‘rents’, rather than encourage innovation.

    How many of these GOP Congressmen are from districts that take in more federal dollars than they generate? I’m not being snarky: it’s a pragmatic question. It’s the kind of question that I think most business people might ask: how credible are these GOP Congressmen, and is it even possible to produce what they want? Or do they simply want unicorns and ponies?

    Prediction: if under the guise of ‘compromise’ the President engages in negotiations about the debt ceiling — allowing it to be driven by the most backward, most rent-collecting Congressional members — that process will further corrode the legitimacy of our political institutions. And that, in turn, will further damage the larger economy.

    ———————-
    *I realize that ‘median’ is a problematic stat to use, but still… the page is informative and worth a look.
    But I think states by GDP is a terrible measure: http://en.wikipedia.org/wiki/List_of_U.S._states_by_GDP
    Note that DC is the highest GDP, and the tax haven states of Wyoming and Delaware are among the ‘top 5′, which makes the GDP measure a bit more problematic.


    • purple says:

      See my comment above about treating red states as monolithic bloc.

      Liberals do themselves no good when they engage in this kind of bad math. It’s cheap political point making, and sad to see that even Krugman occasionally does this.

      There is no point in engaging in this rhetoric unless you really feel the Blue states would be better off separating from the Red.


      • readerOfTeaLeaves says:

        Questioning whether someone has the background, qualifications, and resources to make an informed decision without: (1) having their hands tied by an agreement they signed with Grover Norquist, or (2) being blinded by a political-economic ideology, is not ‘bad math’.

        Questioning the qualifications of people making policy decisions is not a ‘math problem’. I am pointing to a ‘credibility problem’.

        These Congressmen may be decent people of strong beliefs and good intentions. But we are watching a political dynamic that is damaging entire economic sectors and communities; this has many implications for American competitiveness.

        Currently, the Congress has a severe credibility problem. Consequently, it’s worth asking about the credentials, expertise, and qualifications of members of Congress who are controlling economic policies.

        If we read that the Chinese government allowed its most rural, least developed members to drive engineering, tax, medical, or economic policies, we would probably all scratch our heads and figure that such a decision-making process would produce sub-optimal results. We should similarly assess the integrity (or lack thereof) in our own system of governance, particularly as it has been producing sub-optimal results for the middle class and wide swaths of the public for some years now.

        Trying to produce better outcomes in US policy will probably require asking some uncomfortable questions about:
        – who is making the economic and tax policies,
        – how those individuals are compensated (and promoted) — particularly with respect to their ongoing needs for campaign contributions, and
        – what incentives exist for them to produce policies that achieve demonstrably, measurably better overall economic policies and outcomes.

        Those are not simple math problems.
        These are not intended as punitive questions.
        If I have to make a decision, I want someone with expertise.
        This is a fairly pedestrian, run-of-the-mill attitude that has nothing to do with ‘math’ and everything to do with a sober, serious attempt to insure the best possible outcomes.


  10. ifthethunderdontgetya™³²®© says:

    “By over-riding them, blowing past them, ignoring them as irrelevant, and refusing to negotiate on the basis of the chief executive’s Constitutional responsibility to maintain the nation’s creditworthiness, the President can deal a fatal blow to these dangerous obstructionists.”

    Very little sign that this is his intention.

    http://fdlaction.firedoglake.com/2013/01/02/obama-will-keep-pushing-for-deficit-reduction/

    Our President has been trying to cut “entitlements”, the record is quite plain. He merely wants to keep his fingerprints off the knife.
    ~


    • jo6pac says:

      So true


    • Alyosha says:

      Indeed. Same old game, different day. Tea Party intransigence saved us in 2011, but that reprieve was only temporary.

      I’ve spoken to a number of folks in DC who assure me of their belief that for some reason the past is not prologue and Obama won’t cave this time. Strangely enough, none of them felt strongly enough about their conviction to put money on it.


  11. Paul Wolfson says:

    Just coming to this from your ex post collection of posts on the cliff. It reminds me of Abbey Road, starting with Come Together, through the allusion to Maxwell’s Silver Hammer in the 1st paragraph above, and ending with Here comes the Sum. Perhaps a suggestion as to the next musical interlude?


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