The Latest Fiscal Cliff Folly
Here we sit on December 11, in exactly the place any rational person would have expected we'd be six weeks ago....less than three weeks away from the supposed horror of (gasp!) returning to the Clinton tax rates. The consensus opinion of the left, right, and center seems to be that if we are forced to endure the tax rates of those dark days of 1999 at the onset of 2013, we'll be instantly plunged into a recessionary abyss the likes of which humanity has never before seen. In other words, the Grover Norquist messaging on taxes and their relationship with the economy has not only stuck but expanded to the point that "tax increases=recession" is now the accepted dogma of even leftist economists and policy analysts.
The reality is that the relationship between taxes and the state of the economy is much more complicated and in this situation the doomsayers may be right that going off the fiscal cliff will equate to economic problems. At points in the past, when American incomes were ascendant, tax increases were more easily absorbed and had limited effect on the supply and demand curve. Our biggest problem today is that the business community has spent the last three decades hoarding economic resources while allowing wages and benefits to plunge to historically low depths with each passing year, so it makes sense that the sudden imposition of higher income taxes on wage-earners would depress consumer demand even more. Whether that would be enough to trigger another recession is not clear, but it certainly wouldn't help.
The problem is that higher taxes on the wealthy simply won't be enough to pay for the greater role that government will have in a nation full of seniors and low-income workers. Even the best-case scenario restoration of a 39.6% top tax rate for income over $250,000 per year is backsliding towards some possible "compromise" of a 37% top tax rate for income over $1 million a year. The rise in revenue such a shift would produce is hardly worth the nation's time yet I fear that's what the final legislation will look like. Instead of the threshold increasing from $250,000, it should be going the other direction, as we'd really hit the revenue sweet spot imposing higher tax rates on income over $100,000 or $150,000.
My money is on us temporarily going over the fiscal cliff. There will be no deal that Obama and Boehner can hatch out that will be able to get the necessary votes to pass the House before December 31. Tea Party knuckle draggers will oppose any tax increase of any kind while Democrats will wisely balk at any compromise to raise the Medicare eligibility age, the most idiotic concession that Obama consistently puts on the table and which would effectively kill his Presidency by turning his base ferociously against him. Whatever alleged breakthroughs that appear to be approaching in the next 20 days should probably be ignored as the odds-on outcome is likely to be going off the cliff, followed by legislation to lower the January 1 tax increases on most Americans as early as January 2, thus allowing Republicans to not have to vote for a tax increase prior to January 1.
At least that's the most obvious play, but I can honestly see an even more cynical alternative.....where Republicans in the House refuse to pass any tax-cutting legislation at all and tempting a recession, telling Democrats that if they like the Clinton-era tax rates so much they can live with them. Obviously this would be terrible PR for the Republicans in early 2013. The public indicates they will hold Republicans responsible for going off the fiscal cliff anyway, so Republicans would really be in the doghouse if they went off the fiscal cliff and continued to refuse to deal afterwards. But it would be temporary. Obama's numbers would take a hit too based on a "failure of leadership" and ultimately he would own whatever economic fallout followed. Republicans would count on voters' notoriously short memories and low turnout among the Democratic base for the next midterm election to inflate their House margins and take back the Senate in 2014. And it would most likely work just as smoothly as it did for the GOP in 2010 when they pulled the same thing and were rewarded with their largest House majority in more than 60 years.
There's also a third possibility that Republicans will winkingly accept a deal to raise taxes before the fiscal cliff but then hold the nation hostage once again a month or so later in regards to raising the debt limit. While Obama insists "we're not playing that game again", he has unconditionally ruled out raising the debt limit himself through the invocation of the 14th amendment, which means HE WILL be playing that game again. The politics of that manufactured crisis, should it come to pass, will be the same as the politics if Republicans went off the fiscal cliff....the GOP would be radioactive for a few months in 2013 but would come back to win big in November 2014 since they'd turn the election into a referendum against Obama who's not on the ballot.
Basically the conventional wisdom on the politics of this is right only in the short-term. While Republicans have few options to avoid a public policy shift not to their liking in the weeks ahead--unless they are able to con Obama into making unnecessary concessions as he has in the past, which is still entirely possible--the Republicans have the advantage by playing the long game. So long as the party sees destroying their political opposition as their highest priority and is willing to impose ruin on their country as a means to achieve that end, they will ultimately always have the leverage. For all the wishful thinking about the Republican Party being humbled into sanity based on their election loss last month, the party is aware that no matter what, they are likely less than two years away from their next election victory, meaning the motivation to keep Washington ungovernable will probably linger. It's tough to say what will break this new normal in American politics where one lunatic party repeatedly plays the role of domestic terrorist, threatening to destroy the American economy unless they get their way on policy issues, but I dare say whatever breaks it will not be occurring in the next two years.
The reality is that the relationship between taxes and the state of the economy is much more complicated and in this situation the doomsayers may be right that going off the fiscal cliff will equate to economic problems. At points in the past, when American incomes were ascendant, tax increases were more easily absorbed and had limited effect on the supply and demand curve. Our biggest problem today is that the business community has spent the last three decades hoarding economic resources while allowing wages and benefits to plunge to historically low depths with each passing year, so it makes sense that the sudden imposition of higher income taxes on wage-earners would depress consumer demand even more. Whether that would be enough to trigger another recession is not clear, but it certainly wouldn't help.
The problem is that higher taxes on the wealthy simply won't be enough to pay for the greater role that government will have in a nation full of seniors and low-income workers. Even the best-case scenario restoration of a 39.6% top tax rate for income over $250,000 per year is backsliding towards some possible "compromise" of a 37% top tax rate for income over $1 million a year. The rise in revenue such a shift would produce is hardly worth the nation's time yet I fear that's what the final legislation will look like. Instead of the threshold increasing from $250,000, it should be going the other direction, as we'd really hit the revenue sweet spot imposing higher tax rates on income over $100,000 or $150,000.
My money is on us temporarily going over the fiscal cliff. There will be no deal that Obama and Boehner can hatch out that will be able to get the necessary votes to pass the House before December 31. Tea Party knuckle draggers will oppose any tax increase of any kind while Democrats will wisely balk at any compromise to raise the Medicare eligibility age, the most idiotic concession that Obama consistently puts on the table and which would effectively kill his Presidency by turning his base ferociously against him. Whatever alleged breakthroughs that appear to be approaching in the next 20 days should probably be ignored as the odds-on outcome is likely to be going off the cliff, followed by legislation to lower the January 1 tax increases on most Americans as early as January 2, thus allowing Republicans to not have to vote for a tax increase prior to January 1.
At least that's the most obvious play, but I can honestly see an even more cynical alternative.....where Republicans in the House refuse to pass any tax-cutting legislation at all and tempting a recession, telling Democrats that if they like the Clinton-era tax rates so much they can live with them. Obviously this would be terrible PR for the Republicans in early 2013. The public indicates they will hold Republicans responsible for going off the fiscal cliff anyway, so Republicans would really be in the doghouse if they went off the fiscal cliff and continued to refuse to deal afterwards. But it would be temporary. Obama's numbers would take a hit too based on a "failure of leadership" and ultimately he would own whatever economic fallout followed. Republicans would count on voters' notoriously short memories and low turnout among the Democratic base for the next midterm election to inflate their House margins and take back the Senate in 2014. And it would most likely work just as smoothly as it did for the GOP in 2010 when they pulled the same thing and were rewarded with their largest House majority in more than 60 years.
There's also a third possibility that Republicans will winkingly accept a deal to raise taxes before the fiscal cliff but then hold the nation hostage once again a month or so later in regards to raising the debt limit. While Obama insists "we're not playing that game again", he has unconditionally ruled out raising the debt limit himself through the invocation of the 14th amendment, which means HE WILL be playing that game again. The politics of that manufactured crisis, should it come to pass, will be the same as the politics if Republicans went off the fiscal cliff....the GOP would be radioactive for a few months in 2013 but would come back to win big in November 2014 since they'd turn the election into a referendum against Obama who's not on the ballot.
Basically the conventional wisdom on the politics of this is right only in the short-term. While Republicans have few options to avoid a public policy shift not to their liking in the weeks ahead--unless they are able to con Obama into making unnecessary concessions as he has in the past, which is still entirely possible--the Republicans have the advantage by playing the long game. So long as the party sees destroying their political opposition as their highest priority and is willing to impose ruin on their country as a means to achieve that end, they will ultimately always have the leverage. For all the wishful thinking about the Republican Party being humbled into sanity based on their election loss last month, the party is aware that no matter what, they are likely less than two years away from their next election victory, meaning the motivation to keep Washington ungovernable will probably linger. It's tough to say what will break this new normal in American politics where one lunatic party repeatedly plays the role of domestic terrorist, threatening to destroy the American economy unless they get their way on policy issues, but I dare say whatever breaks it will not be occurring in the next two years.
posted by Mark at 10:33 AM
1 Comments:
The difference between now and 2010 is that Republicans control the House and everybody knows it. In 2010, Democrats controlled everything and Republicans were free to throw bombs.
This time Republicans control the House and voters know it and they will be punished for their actions in 2014.
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