A few thoughts on the tax cut compromise

The tax cut deal is in. I would agree with Felix Salmon’s take, that "this is tax cutting, Oprah-style: you get a tax cut! And you get a tax cut! And you! And you! You all get a tax cut!" Since Democrats and Republicans were never going to agree on which tax cuts were a priority the compromise was to make all of them a priority. This is certainly what I expected as far as the Bush tax cuts go.

  • The Administration has now moved into re-election mode. Uppermost in their mind is the need to demonstrate that they have taken the right policy steps on the economy all along. And this means making the recovery stick… Therefore, he will want to demonstrate his ‘for-the-people’ bona fides by making the technical recovery stick in a way that benefits most voters. Income tax cuts are the easiest way to do this given the way that the economic gains of GDP growth have been going disproportionately to upper-income households. Republicans have already warned they will reject any attempts to push through cuts that don’t also include upper income individuals using a small-business angle. The President, worried about this anti-business rhetoric will accede to across-the-board cuts, if only temporarily.
  • What is important here from the President’s perspective is the part in the last paragraph about how he must "demonstrate his ‘for-the-people’ bona fides". That’s what is going to win him elections. And the President is a politician, so these are the things he is thinking about. Swampland reaches a similar conclusion:

    Long before the midterm ballots had been counted, White House aides had begun to mull the coming agony of divided government. As the Obama team worked out its options, one priority kept coming to the top: However, the next two years shook out, they told themselves, Barack Obama needed to convince the great middle of the American electorate once again that he was fighting for them.

    The problem is that victories must be both real and symbolic. In the Swampland article, Michael Scherer quotes the President as saying:

    “I’m not willing to let working families become collateral damage,” Obama said. “The American people didn’t send us here to fight symbolic battles or win symbolic victories.”

    I don’t think that is true. People do want you to win symbolic victories. I am surprised the President doesn’t realize this because he campaigned as "Change you can believe in" and to date, most of the change has been more stylistic and less substantive (see Jamie Galbraith’s comments on this.) What voters want is both a symbolic and a real victory. Symbolism is important in rallying the base – and judging from Jamie Galbraith’s comments, the base is dispirited.

    Now, Obama wants to capture the middle by taking to the center as Clinton did after 1994. In reality, he has already lost most of the center-right votes which he captured in 2008. Clinton had not lost these voters – and Clinton benefitted from an economic recovery that was goosed by "irrational exuberance." Remember, it was just after the time that Clinton was re-elected that Greenspan made these remarks. Barack Obama is not going to get these tailwinds. So I think his tacking to the center is fraught with peril.

    The other two issues I thought worthy of mentioning involve the word ‘temporary’ and the word ‘deficit’. These tax measures are designed to be ‘temporary’ just as the original Bush tax cuts were. Clearly, temporary has a way of becoming permanent when push comes to shove. The deficit will be increased by this stimulus package. The hope is that this will keep the economy out of recession.

    As for the future, I still expect no foreclosure moratorium, no defense cuts, and no major social agenda. The President has already announced discretionary spending cuts and offered up Social Security and Medicare for cuts as well. So I have three right and three to go.

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