The Agenda

Ezra Klein on 1 January 2013 as a Potential Doomsday for the Right

At Wonkbook, Ezra Klein suggests that Republican intransigence may result in a massive increase in public spending and taxes:

So now there are two triggers. One is an extremely progressive spending trigger worth $1.2 trillion that goes off on January 1, 2013. The other is an extremely progressive tax trigger worth $3.8 trillion that goes off on…January 1, 2013. If you count reduced interest payments, the two policies alone would reduce future deficits by about $6 trillion. That’s far more than anything the supercommittee came close to discussing. It’s distributed far more progressively than anything the Democrats have even considered proposing. And all that needs to happen for it to pass is, well, nothing.

Republicans can’t stop these triggers on their own. They need Senate Democrats and President Obama to join them in passing an alternative, or they need House and Senate Democrats to join them in overturning President Obama’s veto of their alternative. So the only way for Republicans to avoid this dual-trigger nightmare is to somehow convince Democrats to bail them out. And for that, they have two points of leverage.

The first is political: Democrats don’t want to raise $3.8 trillions in taxes, much of which will fall on middle-class households. Already, Democrats have said that their preference is to make the the Bush tax cuts for income under $250,000 permanent. That means making 80 percent of them permanent.

The second is that this particular deficit-reduction plan could be devastating for the economy. Rather than phasing in slowly over the course of the next decade, it would all hit at once. If the economy was stronger, that might be fine. But in a recovery this weak, it could lead to another contraction.

So the GOP is not without options. But the Democrats are in the driver’s seat. [Emphasis added]

This is a very insightful way of framing the near-term landscape. A slightly different way of putting it is that congressional Republicans have made a big bet on winning the White House and expanding their influence in Congress in the next election cycle. Drawing on the same broad theme, Matt Yglesias offers an illuminating historical analogy:

Recall that an analogous situation arose in the fall of 2009 during the debate over the health care bill. Democrats, at that point, were desperate for a bailout from the GOP congressional minority. In order to stop the bleeding on the health care bill and score a warm, fuzzy bipartisan victory they would have been willing to make major policy concessions to the Republicans. After Scott Brown beat Martha Coakley, full-scale panic was developing. Huge numbers of Democrats were eager to jump ship and pass a “scaled-down” bill. But Republicans made it clear that they were going for the kill. They didn’t want any concessions and there was no support for a scaled-down bill. Democrats were backed into a corner where they were left with no choice but to pass the big bill. So they did. This got Republicans what they wanted in 2010 — a major electoral win — but it didn’t help them on policy. Now the same game is playing out on the long-term budget, but this time for all the marbles. Team Obama really, really, really wanted a bipartisan deficit deal which they believed (wrongly, I think, but that’s another story) would have boosted their re-election campaign and they were willing to make major substantive concessions to get it. Republicans weren’t interested. If they win big again in 2012, their approach will be vindicated. But if Obama gets re-elected, they’ll have fumbled the policy substance in a catastrophic way and put in place a budget framework that’s much more left-wing than the one Obama was begging them to agree to a few months ago. [Emphasis added]

And earlier in the same post, he explains how the political ground might shift:

If Obama loses and the Democrats (as expected) lose Senate seats, then it’s not really going to matter what Obama did and didn’t veto. President Romney or President Gingrich will merrily enact a new tax cut package, restore defense spending, and proceed to contemplate his options on domestic spending. They’ll also act to start chipping away at large chunks of the Affordable Care Act and likely dismantle the Dodd-Frank financial regulation framework. It’ll be as if the entire Obama presidency didn’t happen (incidentally, I think this explains Jonathan Chait’s question about liberals and Obama — he’s unpopular and if he loses he won’t have achieved much of anything). But if he wins, then the new baseline is going to be one that Democrats never could have passed through a normal legislative process. In fact, it’ll be one they wouldn’t even have dared to propose.

This frame raises another question: if both triggers are pulled, might a Republican president have more flexibility on the revenue side? Among conservative activists, there is intense resistance to any talk of tax increases, with the possible exception of base-broadening measures coupled with MTR cuts that might prove slightly revenue-positive. In a world in which the baseline shifts considerably, perhaps a Republican president could pass a tax cut relative to the new baseline that would sidestep some of these concerns.

A more likely scenario, given the potential economic impact of a sharp rather than a gradual tax increase, is a straightforward snap-back, in which a Republican president immediately restores the status quo ante shortly after taking office. Yet this crucially depends on the partisan composition of Congress. If, for example, there is a Republican president yet Democrats manage to win a majority in the House, we’d need some kind of compromise proposal. This might lead to scorched-earth battles and legislative patches. Or it might lead to a more durable settlement that involves a substantial revenue increase and a high degree of progressivity, but with MTRs remaining relatively restrained.

If the president is reelected, however, Republican calls for tax cuts might gain renewed potency. 

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