Monday, March 19, 2012

The busted grand bargain was terrible -- but was it even worse than we knew at the time?

When I read the Washington Post's fly-on-the-wall account of last summer's failed negotiations for a "grand bargain" on deficit reduction, I felt it added more detail to what we already knew: Obama was ready to cut a horrendous bargain, deeply cutting spending while adding only $800 billion in new revenue over ten years, before the Senate Gang of Six unveiling made him raise his "ask" and so licensed the Republicans to walk away.

Chait, however -- who was quite vocal about the gross inadequacy of Obama's proposed deal at the time -- asserts that the Post's account reveals the pending deal to be even worse then was known publicly last July:

The blockbuster fact in the Post’s report, which the story does not in any way grapple with, is that even the $800 billion in tax revenue offered by Boehner was not, in fact, $800 billion in tax revenue:
In Boehner’s offer Friday night, the taxes came with strings attached. The Republicans wanted Obama to give up plans to raise the tax rate paid by the wealthiest Americans, now set at 35 percent. Instead, they wanted that rate to go down. They also wanted to preserve low rates for investment income — one of the biggest perks for the wealthy in the tax code — and establish a blanket exemption from U.S. taxes for corporate profits earned overseas.

Another key caveat: Much of the $800 billion would have to come from overhauling the tax code — not from higher tax rates. The Republicans believed lower rates and a simpler code would generate new revenue by discouraging cheating and spurring economic growth. If the White House would agree to count that money, the Republican leaders said, then they might have a deal.
Okay, so the Republicans were demanding big tax cuts for the rich — lower income tax rates, and keeping in place the tax breaks that most benefit the rich, thereby insuring that the burden of any higher revenue would fall on the non-rich. Obama, incredibly, agreed to that — he agreed to a debt reduction plan that would exempt the wealthy from any sacrifice, and indeed protect them from the possibility that their tax rates would rise when the Bush tax cuts expire.

The incredible thing is that even this offer was not enough. Republicans also demanded that the $800 billion in higher revenue largely come from assuming that lower tax rates would cause the economy to grow.
Chait does acknowledge that the administration was not prepared -- so they claim -- to allow 'dynamic scoring' to tally up phantom revenue as part of the $800 billion.  Accepting that, I don't think the deal was worse than we knew at the time. According to the Post, the Republicans agreed to "drop the demands on investment income and overseas corporate profits." The fact that top rates would go down simply reflects the premise on which Bowles-Simpson and every other floated tax reform plan was based: that new revenue would come through reducing "tax expenditures," or targeted tax breaks, and those gains would be partly offset by lowering marginal rates.  Obama was willing to make the tradeoff between reduced marginal rates and closed loopholes with far too little new revenue added -- $800 billion instead of the $2 trillion in Bowles-Simpson. But we already knew that.  Bowles-Simpson lowers top rates too. And the partially closed 'expenditures' may have included the current low capital gains and dividend rates.

I blanched as Chait did when I read the Post's version of what the Republicans were asking for as the deal was taking shape. But by the time I got through the alleged GOP concessions and the near-endgame, I felt we were back on familiar ground.

What I found perhaps more dispiriting was Greg Sargent's excerpt from David Corn's newly released Showdown, purporting to explain why the administration pivoted to deficit reduction after the midterm election blowout. Here's one of the passages Sargent put up:
With Sperling sitting in on the presentation, Garin reinforced the White House view that Democrats had to up their game on deficit reduction. His firm had conducted extensive polling and focus groups. He told the senators that voters saw jobs as the most pressing priority. This might seem to support those Democrats who believed Obama had gone too far overboard on the deficit-reduction cruise. But when asked what the president and Congress should do to boost job creation, most voters said reduce the deficit and the debt. They had imbibed the GOP message; the problem with the economy was governmental red ink.
That was not accurate. The financial crash that triggered the economic collapse was unrelated to federal deficits. But Garin measured voter perceptions, not whether voters were correct. And he told the senators that voters would not listen to what the Democrats — including the president — had to say about jobs and investments if they did not sense that the Democrats were willing to wrestle the debt monster to the ground.
Sargent's gloss: "As both these passages show, Dems and White House officials knew that the policy justification for the pivot to deficit reduction was flimsy at best. But they decided they couldn’t win the short-term argument, and went ahead and pivoted, anyway."

That's harsh but, I fear, largely true. There's a less cynical interpretation, taking Obama pretty much at face value: he said both before and after the grand bargain collapsed that he hoped (or had hoped) that putting deficit worries to rest would clear the ground for a renewed focus on jobs and long-term investments.  Motive is always overdetermined.  That's true too. But admirers of Obama have to contend with awareness of just how pathetic and destructive a bargain he was willing to strike.

1 comment:

  1. The debt negotiations have fascinated me, so I very much appreciate this extra info. I've sensed before that Obama is a poor negotiator, so I'm not surprised to find out that cooler heads among the Senate Dems prevailed (see this). But who was the architect of the smart Dem position? I'd like to know.

    It's interesting that the GOP continued to push the same bargaining position throughout the fall, even though the Dems showed that they wouldn't accept it. The GOP seems to have less flexibility than the Dems, and it's working to their disadvantage.