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Thursday, July 21, 2011

Let's Make a Bad Deal?

Though there are denials from both sides, there are reports that the White House and Speaker Boehner are close to a deal:

Boehner and Obama Close to Deal, Leaders Are Told, NYT: The Obama administration has informed Democratic Congressional leaders that President Obama and Speaker John A. Boehner were starting to close in on a major budget deal that would enact substantial spending cuts and seek future revenues through a tax overhaul...
Officials knowledgeable about the conversations between the administration and Congressional leaders said the details of the potential package remained unknown but they presumed it would include cuts and adjustments in most federal programs, including Medicare.
However, officials on all sides of the tense negotiations warned that no firm deal was in hand yet...
The agreement was likely to rile Democrats, who could view it as more tilted toward Republican priorities than a bipartisan plan issued by the so-called Gang of Six senators this week; its prospects with conservative House Republicans were uncertain as well. Though it would initially appear to meet Republican demands for less reliance on new revenues as part of what Democrats have called a “balanced” approach, Republicans could be uneasy about accepting a plan tied to a higher future revenues through tax changes.
“The trick on this has always been the tax issue,” one Republican said.

The reports indicate the deal is for $3 trillion in deficit reduction, though the baseline for those calculations, i.e with or without the Bush tax cuts expiring, whether the AMT is assumed to increase, etc., isn't given so it's hard to evaluate precisely.

The plan involves immediate spending cuts, and "future revenues through a tax overhaul", and the immediate spending cuts pose a risk to the economy. The cuts will further reduce demand at a time when lack of demand is already a big problem, and that will make it harder for the economy to recover. So the question is, if the tax increases could be delayed, why couldn't the spending cuts be delayed as well? Delaying the cuts would reduce the risk to the economy without having much impact on long-run debt projections, and it would also preserve the bargaining chip Democrats need to actually get tax increases in the future. If one can be delayed, why not the other, particularly with the shape the economy is in right now? Why does only one side -- the Democrats -- have to make a down payment on the deal by enacting cuts now while the other -- the Republicans -- are only asked for promises about the future?

Republicans will take the spending cuts they can get for now, and perhaps agree to future tax increases -- that isn't certain since there's no deal yet. But if there is a deal, when it comes time to actually implement the tax increases Republicans will make up an excuse as to why it is a really bad time to increase taxes at that time -- employment, growth, the effect on small businesses, they'll find something -- and fight it tooth and nail. So it's not clear Democrats will actually get the tax increases they are promised. Even setting aside worries about undercutting key social programs such as Medicare and Social Security, if the reports are correct this is a bad deal for Democrats.

    Posted by on Thursday, July 21, 2011 at 12:06 PM in Economics | Permalink  Comments (50)


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