Fiscal Cliff Deal, Part 2: Silver Linings

| January 2 2013
Christopher Cook

In Fiscal Cliff Deal, Part 1: Understanding Boehner, I conclude with the following:

This bill doesn’t do much to fix our real problems, and it causes some problems of its own. At some point, Republicans are going to have to do more than simply slow the ship of state’s journey towards the abyss. At some point, they are going to have to take a stand, wrest the controls from those who would plunge us into that chasm, and turn the ship around.

As someone who tries to walk the fence—who looks to balance a strong sense of ideological purity with acceptance of political reality—I am open to the argument that this moment was not, and could not be, that moment. But that moment is coming. It must.

What that moment will look like, and how it will play out, is still unknown. Even when it comes, the harbingers may not be clear, and we may not know for sure that it is indeed the moment. The nation has a difficult road ahead. The GOP and Speaker Boehner have a difficult road ahead. There are those who seem completely sure that they know when it is time to stand on the purest of principle and when it is time to bow to political reality. I must say, I am compelled to envy that surety, for I do not feel it myself. And I do not envy Speaker Boehner for the difficult job he faces in trying to find that balance.

I am much more a meliorist than an optimist. I am compelled to believe that things can always be made better through human action, as opposed to simply believing on faith that things are already better. But one thing I am definitely NOT is a pessimist. Yes, there is a lot not to like about this bill. But when the dust settles and the morning sun starts to peek through, I tend to look for silver linings. And this morning, I have read two analyses that indicate there is much about which to be pleased in the fiscal cliff deal too.

The first comes from Yuval Levin, who believes, compellingly, that there is more good in this deal than may at first meet the eye:

Maybe Republicans did that, maybe they could have done a little better, but they probably couldn’t have done much better.

But the Democrats could have, and the story of their failure here has not yet gotten the notice it deserves. In the long run, when the dust has settled, I think that will be the real story of the fiscal cliff. For liberals, this was not a moment of danger to be minimized but by far their best opportunity in a generation for increasing tax rates (which is the only fiscal reform they seem to want) and for robbing Republicans of future leverage for spending and entitlement reforms. And it is likely the best one they will encounter for another generation. Many on the left have seemed convinced lately that the politics of taxes had changed dramatically in their favor, and that the opportunity presented by the cliff could result in the kind of surge in revenue that could put off the coming fiscal crunch for years (until, they seem to think, it will just magically go away at some point) and so could save our entitlement programs from the need for reform. Their politicians gave up a lot of that leverage well in advance, when they announced they would repeal the Bush rates only for people making more than $250,000. But some liberals believed this could be overcome through much expanded caps on deductions in addition to higher rates for the wealthy (that is, a broader base with higher rates), which would both raise more revenue and make Republican-style tax reform (a broader base with lower rates) much more difficult later. And they believed that the Republicans’ opposition to tax increases would also give Democrats an opportunity to score some other points, like forcing Republicans to sign on to Obamacare-style counterproductive provider cuts in Medicare, so that Republicans couldn’t criticize those anymore.

The White House at first tried to do all of that. They wanted about $1.6 trillion in revenue—a trillion from rate increases and $600 billion from the elimination of deductions. They wanted $400 billion in exactly the wrong kind of Medicare cuts—provider cuts that not only make the health-care system less efficient but also tend to increase spending in the long run due to increases in the volume of services—to blunt Republican criticism of Obamacare and to make real (if incremental) structural reform far more difficult.  And they wanted control of the debt ceiling, so Republicans would never have that leverage again. That would not only have given them relatively significant new revenue, it would also have strengthened their hand to get even more later.

But that hasn’t happened here. This deal is projected to yield $620 billion in revenue over a decade—increasing projected federal revenue by about 1.7% over that time. And that’s about it. The Democrats have made the Bush tax rates permanent for 98 percent of the public, which Republicans couldn’t even do when they controlled both houses of Congress and the presidency. They did not get to pick and throw away the low-hanging fruit that could be used in future rate-reducing tax reform (in fact, they retained some “extenders” of tax credits and deductions that could better enable such reform, and the new and more honest CBO baseline that results from this deal eases the way for it), they did not get to claim that they have reformed Medicare without touching its structure, and they now have to move immediately into a debt ceiling fight. Right after a tax-only deal, and just as people start to notice higher payroll taxes, they’re not in a great position to demand more rate increases in that fight, or others to come.

If even under the conditions of the past month—with a very liberal president just re-elected, Republicans in disarray, public opinion on taxes seemingly friendlier to them than it has been in decades, and higher tax rates automatically taking effect—the Democrats can’t get more than a tiny pittance of revenue and no chips to use later, then their basic approach to fiscal issues just won’t work. The idea that they will raise rates again in the Obama years when they don’t have all these factors working in their favor is a fantasy. And the notion that the politics of taxes has decisively changed in their favor has been disproven by their own behavior: Many Democratic senators were as relieved as Republicans to see the threshold for higher rates rise well above $250,000, and would not have stood for it dropping below that level to where their upper middle class voters are. Having discovered an effective political wedge in the tax debate, the Democrats have now basically used it up and gotten awfully little in return. They can’t begin to acknowledge that the levels of spending they want to sustain will require a far greater tax burden on far more people (and in a far more regressive way) than today’s code, and if they can’t even state what they want out loud then they’re not likely to get it. Their bluff has been called. The welfare state they want to retain and expand cannot be funded, and they apparently have no way to do anything about that.

I cannot, in good conscience, excerpt any more than that. You simply must go and read the whole thing.

Levin’s points are very well taken. The recent election, while close, did have the feel of a bit of a national repudiation of the GOP. Directly following that, the GOP taking a stand on a principle with which a majority did not agree (not raising taxes on the “rich”) would have harmed them politically. Though less than ideal, this deal settled a number of questions, potentially leaving the GOP with a lot more maneuvering room for the next set of crisis-level negotiations we face in a couple of months. The tax issue is much more settled. The Bush-era rates are now permanent for all but a small percentage of Americans. The Democrats lost a huge talking point. Obama and the Democrats were making great hay over saying that the Republicans would let middle- and lower-income America go over the cliff to protect their rich buddies. That talking point is gone now. The left got far less than they would like to believe they got out of this deal. That is small comfort if we only think in terms of an imagined ideal, but if we consider what was actually feasible, it is much greater comfort indeed.

The other silver-lining analysis to which I would like to call you attentions comes from John Hinderaker over at Powerline.

But what happens now that Obama has gotten his way? It will soon become apparent that the fiscal cliff deal, including precisely the tax increases that Obama has been demanding for four years, makes hardly a dent in the deficit. At best, it will reduce the deficit by five or six percent. We will continue to run up deficits of close to $1 trillion a year, and the national debt will continue to grow, as Obama has always intended. This fact can’t be hidden; it will be reported. Journalists who have pulled their punches in the past because they wanted Obama to be re-elected will now begin to ask, what are we going to do about the deficit and the debt? At some point, perhaps sooner rather than later, interest rates will begin to rise, at which point the debt issue will become a crisis. And Republicans will say: we told you so.

The Democrats will have only three choices: they can try to raise taxes on the “rich” even higher. But raising them to 100% wouldn’t deal with the deficit, even if you assume all those rich people are willing to work for free. The second option is to restrain federal spending. The Democrats would rather die than do that. The third option is to try to raise taxes on all those millions of Americans who aren’t rich. That is what the Democrats will do once the moment arrives when they can no longer ignore the trillions of dollars in debt they are inflicting on our children. That will be, politically, a very bad moment for the Democrats and a very good one for the Republicans, who can offer the alternative of less spending and who will have been proved right with respect to the biggest policy debate of recent years.

All of this is another way of saying that, with the Democrats’ BS about raising taxes on the rich out of the way, we can have a rational debate about the country’s fiscal future. And that is a debate the GOP can win, as most voters continue to believe that it is better to cut spending than to raise taxes on them. So let’s not despair: the post-cliff landscape may well prove favorable to the sorts of reforms that have been impossible for the last four years.

read the whole thing

I understand the disappointment and misgivings about the deal. I share these feelings. But it may have been the best deal we could get at this juncture, and it allows us to live to fight another day—possibly even strengthened a bit, given the mood of the electorate right now. And if Levin and Hinderaker are right, then this may redound, over the long term, to our advantage.

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