Retrench Warfare

AP Photo/Alex Brandon

Senator Mike Johanns, a Republican from Nebraska, left, walks with Senate Minority Leader Mitch McConnell from Kentucky to the Senate floor for a vote on the fiscal cliff early this morning.

The Senate vote just before dawn in favor of a permanent tax hike on the top one percent defers virtually all of the other budget battles. Assuming the House follows suit today, it is up to President Obama and the Democrats to radically change the conversation.

In the deal that the Senate agreed to, with only eight senators voting against, the Democrats won big in two respects. They forced the Republicans to raise taxes on the rich, and they took all spending cuts including in Social Security off the table—for now. If Tea Party Republicans vote against the deal and it passes the House with the voters of nearly all Democrats and a few dozen renegade Republicans, it could cost John Boehner his Speakership.

But automatic cuts of $120 billion this year and $1.2 trillion over a decade—the dreaded sequester—were postponed only for two months. So the budget debate ends for the moment, only to start again next week.

The trouble is, Congress and the president are waging the wrong debate. The debate they are having is about how to cut deficits and debts. The right debate is how to get a strong recovery going.

The fiscal cliff was advertised as a potential catastrophe because it would have cut spending and raised taxes by a total of $607 billion in a single year—a fiscal contraction that the Congressional Budget Office says would have pushed the economy back into a recession. But if that cliff was a one-year fiscal disaster, what would ten-year cuts of $4 trillion do to the economy?

It never made any sense to impose larger long-term cuts as a way to head off a short-term contraction. This was always snake oil peddled by the austerity lobby.

Tactically, President Obama is now in a better position to bargain harder over cutting less and raising taxes (on the wealthy) more. But the entire premise of the debate is wrong. We should not be cutting public spending at all. We should be increasing it, because the economy needs both the stimulus and the long-term public investment.

As long as Obama buys into the premise that deficit cuts are the necessary road to recovery, he will have to agree to at least some cuts. In this round, he has done a better job than in the past of clarifying his differences with Republicans on the issue of taxes, but now he needs to move off the idea that austerity can produce recovery—and corner Republicans on that issue the same way he did on taxing the rich.

With Republicans licking their wounds over the fiscal-cliff deal—they were forced to tax the rich and then didn’t get spending cuts—Obama has a very strong hand. The question, as always, is how he will play it.

One other detail: I think it was a mistake, both substantively and tactically, not to extend the two-percentage-point tax cut in payroll taxes. A majority of workers pay more in payroll taxes than in income taxes. With the fiscal-cliff deal, the public thinks that 99 percent of Americans have been spared a tax increase. But in the first pay period of the new year, everyone’s payroll taxes go up two percentage points. That’s a thousand dollars a year on a median income of $50,000.

Better to continue that break on our most regressive tax, and make up the difference by raising the cap on income subject to the tax. That should be added to the debate in the next round.

The fiscal cliff was billed as a one-time, high drama. But that premise, like the fiscal cliff metaphor itself, was way off. This will be more like trench warfare. Obama—and sensible economic policy—will win only by drastically changing the way Americans think about deficits and economic recovery.

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