The Long Game, Revisited


[Re-posted from earlier today]

It's been interesting to see how the final mini-cliff-deal on taxes has been greeted on left and right. The left is pissed that Obama did not go fully over the cliff, using the post-re-election sunsetting of the Bush tax cuts to get all the revenues he campaigned on. The right is eager to get on with the debt ceiling fight, keen to forget the implosion of Plan B and their votes for one of the biggest tax increases in recent times (see the above chart from Zachary Goldfarb ranking the tax hikes in terms of their percentage of GDP). Obama yesterday basically said that he regarded the tax increases as simply the premise on which any future Grand Bargain needs to be agreed upon. And he is insisting that the next deal – on entitlements and tax reform – be equally balanced between revenue increases and spending cuts.

Well he can insist, but why would the GOP not talk right past him? The answer to that is that Obama has not lost all his leverage. The sequester remains – and is suspended only for two months 158838193(a reasonable compromise, although I'd have preferred it going into force already as a way to pressure these politicians into grander ambitions). The threat to the Pentagon therefore endures, which frightens those Republicans (and many Democrats) still wedded to a Cold War defense strategy a couple of decades after the Cold War ended. And the threat to Medicare hasn't gone away for the Democrats. Both sides will want to mitigate these crude cuts – and closing loopholes is one way to do it. Another Small Bargain with more revenues – and fewer loopholes – is therefore not necessarily a pipe dream.

And so you see that Obama's re-election has meant the biggest increase in revenues to the federal government since 1968. That would not have happened under Romney. And if the tax deal is not as big as the polls suggest Obama could have gotten away with, it is in part because of the contextual reasons Bruce Bartlett lays out here, in part because Obama genuinely believes in exercizing responsibility as president, but also in part because the president wants to avoid too much austerity too soon as we inch out of the worst recession since the 1930s.

It seems to me this latter point is under-rated. The left often talked of the fiscal cliff as if it were only win-win for Obama. It wasn't, in my view. He faced two dangers: of seeming unable to come up with a compromise (which is integral to his appeal) and of seeing the US economy sink under the weight of an imprudent and drastic reduction in demand. As Josh Marshall has noted, Obama always wanted a deal. No president wants to kick off his second term with a double-dip recession. He got half of a deal that will not have as drastic an effect as the full cliff-divers wanted.

Does the promised debt-ceiling hostage-taking by the GOP render all this strategy moot? Maybe. But it seems to me that the GOP has hurt itself so far since the election on fiscal matters – appearing, especially last week, as a herd of feral, foam-flecked cats. I don't see their threatening to ruin America's credit unless they get to cut Medicare by $500 billion over a decade as a particularly strong political hand. Any party triggering a self-imposed credit crisis as the economy recovers will not be rewarded politically. On that, especially after 2011, the president has the upper hand. Americans do not like monkeying around with the national credit rating as a way to cut medical care for grandma.

More to the point, the GOP has yet to even lay out the details of its proposed entitlement cuts (and campaigned in part against them). One way out would be for both parties to focus on cutting the Pentagon bloat – but that's not going to happen any time soon. And so I can see revenue-raising tax reform returning as a way to alleviate some of the political pain on both sides.

In other words, I can see Obama's logic here. What he's getting – which is a gradual shift toward more fiscal responsibility, with key protections for the working poor and the unemployed in place – is all he really wants right now. Like many of Obama's incremental achievements, you can sometimes miss the forest for the trees. We have the biggest tax hike in decades – without a sudden recession. And we have huge, painful spending cuts looming unless new revenue is found through tax reform. The end result – for all its unseemly messiness right now – may still be a sane, graduated fiscal readjustment as the economy recovers. The sequester can be back-loaded a little to find that elusive sweet spot between structural fiscal rebalancing and economic growth. And we could even clean up the tax code a little.

It's not great, but it will do. Sometimes, the little advances are preferable under certain circumstances to big breakthroughs. And Obama has to face a rabid Republican House probably for his next four years. They self-destructed on Plan B. They will almost certainly have to swallow hard and vote for big tax increases in the next day or so [and, in fact, now have]. And a campaign to slash Medicare is their next major goal. A phrase springs to mind.

Meep meep.

(Photo: U.S. President Barack Obama delivers remarks about the fiscal cliff negotiations in the Eisenhower Executive Office Building next to the White House December 31, 2012 in Washington, DC. By Chip Somodevilla/Getty Images.)