Bad Dealing

Well the rumors are swirling with enough detail mixed in that the consensus is probably right: there is a deal in the works. A deal, that is, to prevent us going over the so-called ‘fiscal cliff’. Is this good or bad?

If you’re like me an subscribe to the view that we don’t have a deficit or a debt problem, then assessing any deal is a little surrealistic. You’re discussing a deal to a problem that doesn’t exist.

And, just for the record, the reason we don’t have a problem is that the vast majority of our annual deficit is due to the crisis. The economy dropped like stone taking with it Federal tax revenues. Then, as the recession grew in scale and scope, Federal spending ballooned as the safety net, such as it is, kicked in. These twin features of the budget, both entirely normal and entirely temporary, account for almost all the sudden surge in the annual deficit. The remaining lump was bequeathed us by George Bush and his ill advised tax cuts. The Bush factor is significant, but is manageable for a healthy growing economy. The problem is that since those tax cuts we haven’t had a healthy growing economy, we have been stuck  either in stagnation or in recession and tepid recovery.

Get the economy growing again and our deficit melts like the snow in spring, and the debt gets to be a smaller percentage of GDP even if it continues to grow slightly each year.

Having this realistic assessment in mind is essential when looking at any deal for the ‘fiscal cliff’, since it is an invented phenomenon and not a real feature of the economy. So the discussion is not at all one of resolving a fiscal crisis, but is a more ideological debate about the size and role of government.

For us on the left of center in politics the measuring stick of acceptability with respect to any deal is thus its defense of our expansive vision of that size and role. Plus, at a tactical level, does the deal contain anything that could not have been gained or lost had we simply gone over the cliff?

So. How does the deal measure up?

I give it a resounding ‘C’, bordering on ‘C-‘.

Why?

It gives up two pieces of treasure that I think could have been kept.

First, it allows the temporary payroll tax cut to elapse. This is especially annoying since our payroll taxes are not very progressive. Indeed since we do not collect tax on any incomes over about $110,000, any changes in its levels and rates tend to fall disproportionately on middle and working class incomes. So giving up the cut constitutes a tax increase for the majority of workers. I realize the cut was planned to be temporary, but keeping it another year to bolster demand would have been preferable. Looking on the bright side: since the elimination of the cut will boost revenues into the Social Security system, albeit on the backs of the least wealthy, it will help defeat any talk of imminent bankruptcy or failure of the system.

Second, and this one is more important, it looks as if Obama is about to cave in on changing the indexing for the annual increases in Social Security payments. It is well known that this will reduce those annual increases and thus, potentially, expose our elderly to more inflationary pressure. I realize that we have virtually no inflation at the moment due to the depressed nature of the economy, but we cannot expect that to be permanent. This shift in indexing is a definitive cut in benefits, which is a shocking thing for a Democrat to offer up. Presumably Obama sees it as a vital lure that wins him something that he could not get in any other way.

What would that be?

It cannot be the reported $50 billion in infrastructure spending. In a nation whose infrastructure is rapidly becoming the laughingstock of the western world, the amount is insultingly trivial.

Perhaps it’s the reported increase in revenues. This needs some explanation.

The revenue increase being rumored amounts to about $1.4 trillion. Most of this comes from a rate increase on incomes over $400,000. This, in itself is an Obama concession, since he had previously been holding out for an increase on incomes over $250,000. But by lifting the base of the tax rate increase, it looks as if Obama won two other additional revenue battles. The deal includes an increase in tax on capital gains – putting it back at its pre-Bush 20% – and the re-inclusion of dividends into ordinary income for tax purposes. Plus it seems as if the deal includes a cap of 28% on deductions like mortgage interest and property taxes. By setting that cap at 28% Obama avoids too much damage to the middle class and gets plenty of new revenue from the wealthy.

On balance these revenue increases are slightly more than what would have occurred had we simply gone over the cliff, but not so much more as to offset the damage done on the cuts side.

Another feature of the deal, a minor positive in fiscal terms, but huge in humanitarian terms, is that it extends unemployment assistance. Don’t forget that the Republicans have ben insisting that the emergency extension of those benefits be dropped.

Finally, there are promises from Obama to ante up a further $400 or so billion in more entitlement cuts, but that has to be thrashed out in Congress and so is highly uncertain, especially with the slight shift to the left in the Democratic caucus in the Senate. Besides most of it can come through an Obama favorite – allowing the Medicare system to negotiate for low prices. This would cut spending without harming benefits at all.

Oh, one last thing: the deal seems to include a two year moratorium on the fanatical Republican urge to destroy our national credit rating. They will forbear arguing over the debt ceiling. Oh boy. Never has threatening to be juvenile and irresponsible been taken more seriously in Congress.

That’s about it. That’s the deal.

Is it worth it?

I don’t think so. My point being that any concession during an artificial debate is unnecessary. Our deficit and debt issues, to the extent they exist at all, would have been better dealt with by expansionary policies. This entire discussion about cuts is a major victory for the right. What Obama appears to be doing is conceding the need for a fight over the size of government and then trying to limit the damage.

But his very election last month was premised on the notion that entitlement cuts were not necessary. In the argument about the 47% and his year long advocacy of tax increases on the wealthy Obama rallied support around the notion that the major economic issue we face is job generation and more equal wealth distribution. Two things that, in my opinion, go hand in hand. The country appeared, decisively, to reject the Republican agenda of entitlement cuts. Indeed, exit polls showed that voters didn’t care much about the deficit at all.

Yet here we are, a month or so later, and a newly empowered Obama is giving away entitlement cuts. I don’t think he should. Then again all the furor kicked up about the cliff has dampened confidence. Perhaps getting a deal, even a bad one like this, will be sufficient to get the economy going at a faster rate. Then, with growth higher and unemployment falling, Obama can turn to other parts of his agenda with more confidence.

And that slender hope is why I give a mildly passing grade to what, otherwise, is a both an unnecessary and bad deal.