Dec 9th 2010 | WASHINGTON, DC | from PRINT EDITION
BEFORE and after their thumping victory in the mid-term election last month, Republican leaders vowed to anyone who would listen that they would put a stop to the federal government's "out-of-control spending" and restore America's finances to order. Democrats, also in the name of fiscal probity, have been vowing to raise taxes on the rich since George Bush cut them a decade ago. Barack Obama made a promise to do just that a central part of his election campaign in 2008, and has often reiterated his determination to fulfil it since becoming president.
Those who saw scope for compromise between these two stances turned out to be right"”but not in the way they had probably hoped. In the best Washington tradition, Mr Obama and the Republicans struck a deal on December 6th to abandon their supposedly cherished goals while awarding themselves expensive consolation prizes and putting the problem off for a couple of years. Passage depends on overcoming the opposition of disgruntled Democrats, who on December 9th secured a non-binding resolution against the deal "as currently written" at a caucus meeting in the House of Representatives; the speaker, Nancy Pelosi, indicated that she would not allow a bill to come to the floor unless it was improved. The Republicans might not agree to that, but if neither side backs down there is a real chance that the deal might unravel.
Mr Obama agreed to call off the tax rise for the rich (as the Republicans had demanded) as well as everyone else, though only for two years, which means that the whole poisonous subject will have to be reviewed again in the run-up to the presidential election of 2012. The Bush tax cuts were supposed to be temporary; but allowing them to expire was always going to be politically agonising.
The Republicans, in turn, agreed to a series of handouts for humbler folk that they had previously resisted, including an extension of benefits for the unemployed, a cut in payroll taxes and a renewal of Mr Obama's supposedly one-off tax credits for parents and college students. Business also got a bung, in the form of a faster write-off on investments. Most of these measures are supposed to last for one year.
But despite the supposed anxiety on both sides, especially the Republican one, about America's long-term solvency, there was no mention of any future efforts to trim America's deficit, which was 8.9% of GDP in the last fiscal year. In the short run, though, the economics of the deal are not too bad. The Republicans had argued, not implausibly, that hiking taxes on anyone was risky given the anaemic recovery (although others rejoin that the government could have spent the proceeds from taxing the richest in ways that would have helped the economy more). Mr Obama, for his part, was right to press for more funds to counter what would otherwise have been a contractionary cutting-off of unemployment benefits and tax breaks for the poorest. In all the package will cost an extra $300 billion or so next year; a sizeable sum at a time when the deficit is forecast to exceed a trillion dollars.
The deal certainly cheered America's economic soothsayers. JPMorgan raised its growth forecast for the fourth quarter of next year to 3.5% from 3% as a result. Macroeconomic Advisers, a consultancy, says the new package could raise growth to 4.3% next year, up from its current forecast of 3.7%. All of these numbers, in turn, could imply some decline in the unemployment rate, which edged up to a grisly 9.8% in November; and the true rate of unemployment is considerably higher.
Republicans are also jubilant, seeing Mr Obama's capitulation on taxes as more of a defeat than was their own (sadly typical) abandonment of fiscal rectitude. They had threatened to allow taxes to rise on everyone"”something both sides agreed would be a disaster"”rather than let the Democrats return the rich to 1990s levels of tax misery. The president succumbed to this brinkmanship, saying he could not allow the Republicans' hostages, meaning middle-class taxpayers, to be harmed: a far cry from Bill Clinton's facing down of Newt Gingrich which led to the government shutdown of 1995.
More pugnacious Democrats argue that the president could have got his way if he had held out longer, and dared the Republicans to allow taxes to rise across the board. They point to polls showing that the majority of Americans support higher taxes on the rich. Many Democrats in Congress are threatening to vote against the deal. Republican support looks solid enough, give or take a few tea-partyish defections, to secure a majority in both chambers. Democratic leaders, however, must still bring it to a vote, and are currently insisting on changes before they do that.
But those Democrats had been unable to gather enough support for the president's original plan, to preserve the current tax rates on all but the richest 2% of Americans. Although the House of Representatives passed it with ease last week, it failed to win the 60 votes needed to overcome a Republican filibuster in the Senate over the weekend. Even a slightly amended plan, that would only have raised taxes on those earning more than $1m rather than $250,000, foundered in the Senate. And things would only have got harder when the new Congress convened in January.
Mr Obama, in a rare display of spleen, dismissed recalcitrant Democrats as "sanctimonious" and suggested they were putting politics above the public good. The left has, after all, been clamouring for more stimulus all year, but had seen most such initiatives blocked by the Republicans. Most had despaired of passing an extension of unemployment benefits, let alone the other concessions Mr Obama won.
If that spending does help spur the economy and reduce unemployment, it will stand Mr Obama and his fellow Democrats in much better stead in the elections of 2012"”a benefit that would far outweigh any passing embarrassment from this week's surrender. At the same time, the extra spending the Republicans have acquiesced to is dismaying the deficit hawks in their base, and will doubtless prompt some divisive primary challenges.
Moreover, Mr Obama has promised to take the issue up again when the two-year extension to the current tax rates he has just agreed is nearing expiration, which will be right in the middle of the next campaign. In the meantime Mr Obama is able to look presidential by disregarding the zealots in his own party and embracing compromise. He has made several gestures in this direction in recent days, such as imposing a pay freeze on civil servants over the objections of unions that backed his campaign. His conclusion of a free-trade deal with South Korea is another move towards the centre.
But even if the tax deal does not prove as much of a defeat for Mr Obama as it currently appears, it is certainly a worrying portent for America's alarming public finances (see article). Bond yields jumped a third of a percentage point on news of the deal. As the whole sorry debate shows, temporary tax cuts tend to become permanent in America. Neither the president nor the Republican leadership in Congress so much as nodded to concerns about the soaring national debt while unveiling the deal. Instead, they showed they could compromise only by buying one another off"”a miserable precedent indeed for the next two years.
from PRINT EDITION | United States
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