Fiscal policy: A good deal (under the circumstances): NO REASONABLE person interested in improving the American economy and insuring against debt troubles would draw up the policy compromise that seems to have been reached in Washington this week. But no reasonable person starting from scratch would design America's sclerotic political institutions.... In this imperfect political world, the agreement to temporarily extend all of the Bush tax cuts, extend unemployment insurance, and temporarily reduce payroll tax rates and allow enhanced business expensing looks like a pretty good outcome for the American economy. The sharp criticisms levied at it by both the Democrat base and the country's real deficit hawks are both overstated.... What about the deficit hawks? Obviously, it would be nice if Congress had passed, at some point, measures amounting to a credible path toward medium-term deficit reduction. But no majority exists that's willing to pass such measures, mainly because legislators don't actually care that much about the deficit, mainly because American voters don't actually care that much about the deficit. A full expiration of the tax cuts would have been straightforwardly bad policy; the American economy isn't fit to handle a broad and substantial rise in tax rates (and neither does it need one, given the current market taste for American debt). The cuts for the rich don't add nearly as much to the deficit as the cuts for the rest, and the deal for temporary extension further reduces the fiscal burden (although pundits are right to be nervous about the fact that renewal will be on the table in an election year). The rest of the package simply isn't that big a budget deal; the other policies add up to about $300 billion over two years, which isn't going to make or break the budget.
It's worth continuing to argue for sensible deficit-reduction policy. But it's difficult for me to see movement within Congress for meaningful deficit reduction until bond markets provide pressure. And the shortest way to get there is via a strong economic recovery...
Tax cuts, Oprah-style: The outlines of the tax-cut negotiations have finally come into focus: basically, it’s a kitchen-sink approach where Republicans and Democrats all get the tax cuts they want. The Bush tax cuts get extended for people earning more than $250,000 a year — and unemployment insurance gets extended, along with various tax credits. On top of that, there’s a 2% cut in payroll taxes, and the reintroduction of the estate tax at the Republicans’ preferred level: 35% of estates over $5 million. There’s even a nice new tax deduction for businesses making new investments. 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!... This is expansionary fiscal policy, alright, but a large chunk of it is concentrated in exactly in those areas — like tax cuts for the rich — which have the lowest multipliers when it comes to kick-starting economic recovery. What the country needs is spending, and this bill instead looks very likely to give us hundreds of billions of dollars of saving. The unemployment-insurance and payroll-tax aspects of the deal will be welcomed as exactly the kind of stimulus this economy needs: substantially all of them will be spent rather than saved. But the middle- and upper-class tax cuts, paid for by extra borrowing by Treasury, will be used in large part to pay down personal debt...
There Are No Deficit Hawks In Congress: It’s a point barely worth making, but the tax cut deal demonstrates, for the umpteenth time, that self-proclaimed deficit hawks are frauds. We can’t afford unemployment benefits or public investment, the fake hawks say — but when it come to cutting taxes on the rich, money is literally no object. It’s just possible, as Atrios says, that some journalists don’t understand this; if you do up-close-and-personal reporting, judging politicians by what they say and how they come across rather than by the content of their proposals, you might actually be snookered. But again: none of the people who claim about the deficit actually view it as anything more than a stick with which to beat down progressive ideas.
Is the Tax Cut Cave a Stimulus Gambit?: I brought this up a few days ago, and now it’s being seen as the best face of a capitulation on the Bush tax cuts. Ezra, who I assume is speaking for the White House here, lays that out:
The White House has stopped negotiating for ideal — or even acceptable — tax policy and moved to negotiating stimulus policy. The Bush tax cuts will pump about $100 billion into the economy over the next two years. They’re not the most stimulative way to spend $100 billion, but they’re more stimulative than not spending it, or than raising taxes. And they won’t be alone.... [R]ather than paring the tax cuts and the deficit back, they’re making both larger. If you’re of the mind that the economy needs all the extra help it can get right now — and you should be — this is a lot more extra help than anyone expected Republicans and Democrats would agree to give it. And from a political perspective, if you believe that what matters for elections is the economy — and you should — then it’s worth it for the White House to lose news cycles in 2010 if it means adding jobs by 2012.
I think this is worth giving some attention.... [I]s this better than nothing? Yes. But it’s not the entire story. With an expanding budget deficit, we can expect the tea party-infused House to put forward substantial deficit reduction bills.... You have a lot of attention paid to the Catfood Commission report, to the extent that there’s a supermajority in the Senate next year interested in deficit reduction.... So I don’t think you can look at this stimulus in a vacuum. In a world where the Bush tax cuts expire, you have a credible argument from the perspective of Democratic deficit hawks in the Senate – who are the people who matter here, as they will hold the keys on deficit reduction – that the issue has been dealt with in the near term. In a world where this tax cut-heavy stimulus goes into place, they’re likely to whine and argue for major spending cuts to offset the hit to the deficit. In other words, I doubt you get $300 billion in stimulus in the coming year, when all is said and done. In fact, I’d expect far less than that.... I think this claim of a $300 billion stimulus is a little dubious.