By and large, the deal Obama achieved isn't a disaster. I will praise a few parts of it below, and criticize others. But on balance, I think it would have been better to go over the mythical cliff, pocket the increased revenue, and then prevail upon Congress to pass middle class tax cuts and extend the payroll tax cuts. The GOP was powerless to stop the former, and would have been hard-pressed to reject the latter. It is now no longer possible to get increased revenues out of Congress. And we can neither address our common needs in the coming decades, nor stabilize the debt-to-GDP ratio, without them.
Let's look at the bigger picture.
First, learn a little history by going to this Dylan Matthew post on how we got here. Trust me, its hilarious. Seriously.
Now, back to me. Color me skeptical about the entire state of our policy discourse at present. I refuse to accept the legitimacy of the economic assumptions underlying this so-called 'crisis,' and fear that by engaging in this back-and-forth dealing, Obama and the Democrats have reinforced those assumptions. Essentially, anything that doesn't reverse our slide toward austerity is bad policy. A deal that accelerates that slide -- or that lays the ground for such an acceleration -- is a disaster.
With regard to the $120 billion in budget cuts (the 'sequester'), the can was kicked 60 days down the road. But it will come to a spinning stop at approximately the same time that the debt ceiling crisis hits. Ultimately, whether Obama acted responsibly in the negotiations that just concluded will be determined by what comes next.
And on that, I'm not optimistic. While Obama did bend a bit on the size and reach of the tax increases on the wealthy (thus trading progressively-generated revenue for likely and regressive spending cuts), he didn't give in on entitlements. He certainly sounded the right notes in the wake of the House passage of the deal. When asked about the impending debt ceiling confrontation, Obama declared, “While I will negotiate over many things, I will not have another debate with Congress over whether they should pay the bills they’ve already racked up.” Perhaps he will take Bill Clinton's advice, and invoke the 14th amendment to unilaterally raise the debt ceiling (or abolish it). That is an enormous bargaining chip; let's hope he doesn't give it away at the outset. It should be permanently invoked anyway. From the White House's perspective, they got most of what they wanted in the fiscal cliff negotiations, by hanging tough. Perhaps they have finally been convinced that negotiating against yourself (or assuming you are conversing with a rational interlocutor) isn't wise.
I hesitate to see the deal as positive -- for Obama, for the Democrats, and for the country -- because this whole manufactured crisis relies on one central (and false) premise: that the first economic priority for the US is to get the deficit under control. Most Republicans (and mainstream pundits of all stripes) continue to believe that our slowly growing economy is some sort of divine punishment for our fiscally profligate ways, despite a complete lack of supporting evidence. The idea that cutting government spending will be good for the economy right now is roughly akin to using leaches and bloodletting to cure illness. It only makes sense when embedded within a larger paradigm, one which is internally consistent (and thus appears to be coherent to those inside it), but is otherwise empirically false. There were no budget cuts in the deal, and Obama deserves praise -- for protecting Medicare and Social Security, in particular. But the cuts are coming. And the back-and-forth over the fiscal cliff deal (as well as years of precedent) hasn't given me great confidence in Obama's negotiating abilities.
The vast majority of the present deficit is attributable to 3 things: the economy (first and foremost), the Bush tax cuts, and the wars. The fiscal cliff deal touches only on the second part, and mostly leaves those cuts in place, relative to a return to the Clinton status quo ante.
There is, of course, a likely structural deficit over the long-term, and it must be dealt with. But the primary culprits there are well known: rising health care costs, the possibility of low economic growth over a prolonged period (a 'lost decade,' which the deal does little to prevent), and a tax system that doesn't raise enough revenue from the nation's wealthiest households to fund our basic needs or invest in our future.
The deal isn't a disaster, and I should praise before I criticize. Even if one assumes Obama could have gotten a slightly better deal, under the present circumstances he did manage to keep some disastrous options off the table. My worst fears -- an increase in the eligibility age for Medicare, a cut in Social Security benefits through the chained CPI -- didn't materialize (yet). One can assume, however, that the GOP will try to use the debt ceiling to put this and more back on the table in the coming months. Obama's role in all of this will ultimately be judged by his combined response to the 'fiscal cliff' and the debt ceiling negotiations. If he caves on the latter, it will be difficult to judge the deal passed yesterday as a good one.
The immediate crisis is unemployment, not the deficit. Most of the time, the president acknowledged this publicly. And it is to Obama's credit that he managed to get an extension of unemployment benefits in the deal, as well as various tax credits that are generally taken by working families. The payroll tax cut, however, is gone. And the focus remains on budget cuts, not stimulus.
There are of course 4 other long-term structural problems, which aren't even on the table at the moment: inequality, our broken opportunity structure, our atrophying public sector, and the need to reboot our economic, energy, land use and transportation policies to address new climate and fuel realities. All 4 are corrosive of our economy, and our democracy. And all 4 require more tax revenues in the coming decades (and less defense spending).
Since criticizing the discursive environment from which the 'crisis' emerged is ultimately unproductive -- why rage against the dying of the light? -- there are two specific parts of the deal that deserve criticism:
The debt ceiling showdown was not averted. In Obama's initial negotiations with Boehner, he made it clear that he wanted a permanent solution to this ridiculous legislative practice. As Paul Krugman pointed out recently, "the key thing to remember — and what the GOP hopes you won’t understand — is that raising the debt ceiling only empowers the president to spend money that he’s authorized to spend by Congressional legislation; nothing more." In the modern age, there is no good reason why there should be any debt limit, let alone one that must be raised each year. Obama continually gave ground on this, with no corresponding concessions from the other side. In the 'fiscal cliff' deal he gave it all away, enabling the Republicans to once again take the world economy hostage in a few months, in order to achieve policy victories that the American people clearly rejected just a few months ago. As I noted above, he should follow Bill Clinton's advice and invoke the 14th amendment to eliminate this annual song-and-dance once and for all.
The estate tax remains way too low. The estate tax serves two vital purposes: it raises revenue to pay for public goods, and it helps to at least partly maintain equal opportunity over time, and across generations.
As part of the fiscal cliff deal, the estate tax will rise to 40 percent from its current 35 percent level, with the first $5 million in assets exempted ($10 for married couples). Democrats had earlier sought a higher increase to 45 percent and a lower exemption of $3.5 million. Had we gone over the 'fiscal cliff,' the estate tax would have reverted to Clinton-era levels (remember that socialist utopia?): a $1 million exemption, not indexed to inflation, with a 55 percent tax rate.
First, a little background on this confusing topic. The 2001 Bush tax cuts shrunk the estate tax dramatically. By 2009, the first $3.5 million of the estate of an individual — effectively, the first $7 million for a couple — was exempt entirely from the tax. A tax that had affected only the largest 2 percent of estates in 2001 touched fewer than three-tenths of 1 percent of estates by 2009. And by 2009, the tax rate applied to the portion of an estate’s value that exceeded the exemption level had declined to 45 percent, down from 55 percent under the prior law. Because the estate tax applies only to the value of the estate that exceeds the exemption level — and because of other tax breaks built into estate tax law — the effective tax rates faced by estates that are taxable are generally much lower than the statutory estate-tax rate. Graduated rates for larger estates would bring this effective rate more in line with the statutory rate, while ensuring that the revenue burden of the estate tax is borne by the very wealthiest households.
We did not get a graduated rate system yesterday.
While raising revenue isn't the only -- even the primary -- justification for the estate tax, we aren't talking about chump change here. Take a look at the differences between the various options over the next decade, in terms of money flowing into the public till, in the chart below. The bar on the left applied in 2011 and 2012, and was set to expire on January 1st 2013. The second from the left was Obama's negotiating position. The one on the far right would have kicked in yesterday, in the absence of a fiscal cliff deal.
While the numbers that were ultimately agreed to aren't on this chart, one can reasonably assume they fall between $182 billion and $284 billion over the next 10 years. Thus, the revenue difference between the new estate tax system and the one that existed when Bush took office is over $300 billion in the coming decade. Relative to the size of the deficit (and the likely size of the economy in the coming years), this isn't a ton of money. But when one thinks about it either in terms of what that revenue could purchase and multiply, or in terms of who will carry the burden of spending cuts, the cost is of greater consequence. I do think one can make an argument that the exemption ($1 million) was set too low prior to the 2001 Bush tax cuts, and that a reformed version would include a substantially higher exemption with graduated rates for bigger fortunes above the exemption level. In other words, the estate tax could be made more progressive -- affecting fewer people -- while simultaneously raising more revenue.
But that's not what we got yesterday. Instead, the two parties and the White House agreed to pass up over $30 billion a year in revenue from the wealthiest Americans -- more, if a graduated system had been created instead. This is revenue that the GOP will attempt to claw back from ordinary Americans in a couple of months, when we bump up against the debt ceiling.
Good rule of thumb: every dollar in spending cuts is likely to affect working families and the economy more negatively than each dollar of tax increases on the wealthy will. And while taxes on the wealthy just went up a bit, they also went up on everyone else, because of the expiration of the payroll tax cut.
$30 billion a year, by the way, would get us more than half way toward a high-quality universal pre-k system. As my father and I proposed in our 2005 book, this would be an entirely appropriate way to spend estate tax revenues.
The economy is spinning its wheels, at about $1.5 trillion below its potential. At least 15 million people are unable to find full-time jobs. Despite this, the debate remains fixated on the question of how to cut the deficit instead of how to restore jobs, wages, and output. Obama must shift the focus to economic recovery, and away from austerity. And he can't do this if his initial negotiating positions already concede recovery (and stimulus) as a lost cause. My problem with Obama's negotiating approach isn't so much that he concedes things to the GOP when they're at the table. That's what happens in a negotiation, though presumably one gives something up to get something. My problem is with what he brings to the table in the first place. One should always carry two things into a negotiation: a wish list, and a giveaway list. The wish list should include everything you'd want to see in a possible and realistic deal, but it should also include things you'd love to have but know you probably won't get. And then you start the negotiations by taking things on the 'love to have' list, and either shrinking them or moving them to the 'giveaway' list, in concert with appropriate moves by the other party.
Historically, Obama has given away most of his wish list before entering the room. He did this with the stimulus bill back in 2009. He did with health care too. And he did it with the Budget Control Act in 2011. He did better this time, but we won't really know the ultimate outcome for a couple of months.
Robert Kuttner is a reluctant supporter of Obama's deal as well. But he also acknowledges that the stakes have now been raised for next 'cliff':
Unless Obama continues to play hardball on all fronts, the risk is that he will consent to budget cuts as the price of the next deal, at a time when the economy needs more public spending, not less. He needs not only more spine; he needs to alter the terms of debate, rejecting not only the ideology of Republican right but the economic idiocy of the corporate center, which has persuaded elite opinion (including at the White House) that recovery requires debt reduction.Do you have confidence that Obama can do this? A lot hangs in the balance.