Stop the Insanity: Republicans Should Take the President’s Deal

I tend to group politicians in four quadrants: 1) liberal and pragmatic, 2) conservative and pragmatic, 3) liberal and ideological, and 4) conservative and ideological. To be blunt, I would rather support politicians in buckets #1 and #2, than those in #3 and #4.

Frankly, both ideological liberals and conservatives are in charge of our country now, and it is starting to get scary.

On the one hand, Congressional Republicans ought to be lauded for securing an amazingly one-sided deal from the President on deficit reform. On the other hand, they ought to be chastised for not taking the deal.

A Pretty Sweet Deal

The White House proposed an 83/17% split between spending reduction and revenue increases. The President even went as far to say that the revenue increases would come from eliminating loopholes rather than from raising marginal tax rates. Given that House Republicans produced a report earlier this year that suggested an 85/15% split was “the average for successful fiscal consolidations”, this offer is a pretty darn good one. Yet, many House Republicans continue to push the future of American prosperity to the brink.

There are several reasons why the Republicans should take this deal before it is too late:

Betting on a Bond Market Crash

While the bond market seems to be counting on a resolution to the U.S. debt ceiling negotiations, if talks fail to generate a compromise by August 2nd, all bets are off. Debt rating agency Standard & Poor’s warned on Thursday that it could downgrade the United States’ AAA credit rating later this month, and that there was a 50% chance it might do so in the next three months, if Washington fails to secure an agreement on raising the debt ceiling.

The reduction of America’s credit rating would be a disaster for the bond market, pushing yields upward, and putting downward pressure on bond prices. The end result would be an increase in interest rates for the government, businesses, and households. Higher borrowing rates for the government translate into widening deficits. Higher rates for businesses would result in less capital investment and, consequently, less hiring. For households, higher interest rates translate into higher mortgage rates. Higher mortgage rates would lead to a further softening of the housing market. Weakness in the housing sector, in turn, would ripple throughout the rest of the economy. Finally, high interest rates are correlated with recessions.

Blaming Republicans

By any reasonable measure, be it unemployment, anemic GDP growth, or rising gas prices, President Obama’s economic policy has been a disaster. Some Democrats continue to blame the President’s predecessor, but President Bush has been out of office more than two and half years. At this point, President Obama owns responsibility for the economy and will suffer most from a voter backlash in November 2012.

Until now.

The problem with ideologues in both parties is that when they draw a line in the sand, it is almost impossible for them to walk away from it. Some House Republicans have, unfortunately, put themselves in this position by demanding no tax increases whatsoever.

However, the country got itself into this mess by simultaneously overspending and reducing taxes. Overspending is probably 80% of the problem, while cutting taxes too aggressively accounts for the remaining 20%.

Yet the Tea Party Caucus’ fanatical insistence to avoid any additional taxation whatsoever is completely unrealistic. It further sacrifices the Republican Party’s chances of winning the next election.

According to a recent Quinnipiac poll, American voters disapprove of the way President Obama is handling the economy by a 56 to 38% margin. The Economist rightly suggests that the Republican Party risks alienating “the blue-collar whites who make up 40% of the electorate are fed up with Mr Obama, but also wary of sudden change and attached to entitlements such as Medicare and Social Security (pensions).” Moreover, in the same Quinnipiac poll, voters “will blame Republicans over Obama” by a 48 to 34% margin if the debt limit is not raised.

Ideological Gap Between House Republicans and GOP Voters Wider Than That Between GOP Voters and Democratic Ones

According to Nate Silver, if “Republicans in the House insist upon zero tax increases, there is a larger ideological gap between House Republicans and Republican voters than there is between Republican voters and Democratic ones.” He argues that a recent Gallup poll suggests GOP voters want a deal consisting of 26% tax increases vs. Democratic voters wanting a deal with 46% tax increases — a 20% gap. In contrast, House Republicans want zero tax increases.

Republicans Should Take the Deal

House Republicans really have secured a pretty sweet deal. They should take it, even if it means reversing their anti-new tax pledge. To do otherwise would risk a shot at the 2012 election.

About Sean Patrick Hazlett

Finance executive, engineer, former military officer, and science fiction and horror writer. Editor of the Weird World War III anthology.
This entry was posted in Business, Media, Policy, Politics, Taxes and tagged , , , , , , , . Bookmark the permalink.

15 Responses to Stop the Insanity: Republicans Should Take the President’s Deal

  1. Pingback: Stop the Insanity: Republicans Should Take the President’s Deal (via Reflections of a Rational Republican) | Brucetheeconomist's Blog

  2. pino says:

    The White House proposed an 83/17% split between spending reduction and revenue increases. The President even went as far to say that the revenue increases would come from eliminating loopholes rather than from raising marginal tax rates.

    Now, setting aside for a second that I agree loopholes should be closed in favor of s a simpler and lower tax rate; you aren’t really believing Barack Obama when he talks to you, are you? I mean, he’s done this to you at least twice since you’ve been following his speeches. Unless we see a specific and detailed planning describing his “spending cuts”, I am unwilling to believe the man; he is simply too “in bucket 3” for me to take seriously.

    Now, again, I’m not making the point that we can’t change the way in which we write taxes. For example, we can continue to tax corporations the same and just change the schedule in which manufacturing equipment should be depreciated. That’s fine. 5 years or 7 years…I guess a rule is just that, a rule. However, our leader isn’t taking about THAT. What he IS proposing is changing the schedule on the depreciation of manufacturing equipment for oil companies and, from what I can tell, oil companies only. The same goes for the methods of accounting for the depreciation of corporate jets. Wanna change the methods whereby equipment is taxed? Fine…but change it for all those things. Not this massive play on class warfare that this Bucket #3’er is playing.

    • That’s fair. In principle the proposal seems fair. Whether or not the President were to carry it out is another issue entirely.

    • Scott Erb says:

      They could arrange a deal that would couple spending cuts and tax increases. It’s not really Obama who would be the problem, they need to make sure Senate Democrats will vote for the cuts. If the deal was coupled, they could. Also, there’s a real difference between the leaders cutting a specific deal, and vague talk of spending cuts in speeches. They need to work together, by all accounts Speaker Boehner and President Obama have a good working relationship (apparently they like each other). I think both realize that if they strike a deal it would be harmful to break it.

      • I hope so, Scott. I just hope the bulk of the deal involves spending cuts and that all tax increases are born by everyone, not just the “wealthy.”

        It scares me that a nearly fifty percent of the population pays no federal income tax. Talk about moral hazard…

  3. ted says:

    The problem is spending, not a revenue problem. The republicans should stand firm and look this sham of a pres in the face. We have enough revenues to pay off essential payments. Just like a typical family, let obama decide who gets the rest of the money, since his excessive spending put us in this whole anyway. Affirmative action has decided the direction of our gov. Enough is enough. We need gov on merit, and people advancing on merit. Let us put a stop to socialistic crap to bring this nation back to what we used to know what it was. Sean, you have had too much exposure to the Ivy league model. You should be ashamed!

    • A default is a default. All you need do is look at what happened to Argentina when that country defaulted on its debt. It matters not who the President stops paying. Interest rates will rise, housing prices will fall, and the economy will lurch back into recession. Now is not the time to fiddle while Rome burns.

      • pino says:

        A default is a default.

        We won’t default. Even if we don’t raise the debt limit, we can still spend what we bring in. And what we bring in is way more than the debt obligations.

        Minnesota was a clear example. A Liberal state with liberal policies. The Republicans stood firm and the Governor gave way. The people of the state understood what was going on.

        The problem is spending.

        • I agree that the problem is spending. However, if we don’t resolve the crisis before August 2nd, bond yields will rise for US debt as the bond market loses confidence in American treasuries. The probabilty that Moody’s or S&P downgrades debt also gets higher. There is no reason to gamble the country’s AAA credit rating just to score points on political principle.

          While we may have enough to pay the principal, the interest, military pay, the VA, social security, and medicare, after that, revenue won’t cover the rest.

          This means that operational funding for our three wars will stop. There won’t be anything left for our troops to get home. We will not have enough to fund border control, there will be no more money for homeland security. I don’t even think the postal service will be funded.

          Crazy works well for North Korea and Iran, but it does not suit Congressional Republicans.

          I agree that spending is out of control, but taking the country to the brink is not the way to handle this.

          This is akin to passing Smoot Hawley when every economist argued that it would demolish global trade. Congress did anyway, and the Great Depression predictably got worse.

          This is Smoot Hawley s**t!

        • pino says:

          This means that operational funding for our three wars will stop. There won’t be anything left for our troops to get home. We will not have enough to fund border control, there will be no more money for homeland security. I don’t even think the postal service will be funded.

          So, the question is “who blinks?”

          McConnell firmly believes that Obama will stop paying SS and the backlash will get Obama re-elected. I suspect he’s right.

          On the other hand, Obama is a “bucket-3 liar” and can not be trusted to deliver on spending cuts any more than he can on any of the other promises he’s promised. The republicans need to pass a bill in the house and send it to the Senate.

          By the way, not funding the post office is a money maker. And homeland security. And the department of agriculture and education. Folks in Minnesota found out that government shutting down didn’t really matter all that much.

          • I agree that shutting down the department of education would probably have little impact on anything, but cutting off operational funding for the military would be a disaster.

            Let’s just hope this thing gets solved before it goes over the brink.

    • Scott Erb says:

      Politically, the Democrats will not significantly cut spending unless the Republicans allow some tax increase, even a small one. The US system works on compromise. But what I object to is the claim that Obama got us into this hole. We’ve been digging it for 30 years! During the Reagan years we lost fiscal responsibility, doubling our debt to GDP ratio from 30% to 60% (even as oil prices fell). We’ve been building these imbalances for a long time. We can fix it — we can make cuts, reform entitlements, raise taxes on those who can most afford to pay and then grow the economy over time to a better debt to GDP ratio. We’re not as bad off as Japan (with a 200% debt to GDP ratio), it’s not a crisis yet. But if we default or even look like we might, it could be devastating. Sean is right; it’s a very good deal not only for the GOP, but also for the country in that it gets both sides working together to take significant action to turn around the imbalances. Only working together can this get solved, our system does not allow one side to dictate to the other side.

      • pino says:

        unless the Republicans allow some tax increase, even a small one.

        The GOP has to allow that revenues will go up. How they do this, I guess I don’t really care; as long as the tax RATE doesn’t change. There isn’t a person alive who can claim we have a revenue problem, everyone knows that this is a spending problem. And to allow the hint of compromise on this, in the form of rate hikes, is crazy–we’ll never fix it.

        But what I object to is the claim that Obama got us into this hole.

        He certainly isn’t alone in digging. But hes the last guy with the shovel, and his shovel is mighty big!

        Sean is right; it’s a very good deal not only for the GOP, but also for the country

        I’m not so sure Sean is right. He has correctly pointed out at least twice where Obama speaks words and then implements very different things than those words. It’s like he’s lying.

        If Obama wants to raise revenue, just tell him if we simply do nothing to the tax code, we’ll see an increase of 7.3%. We have, year over year, for decades.

  4. I does appear to me that we could pay the country’s debt service and pay the military while witholding payment of a lot of income support payments with no debt ceiling increase. I have a post on it.

    However, that would mean we would not be making statuatorily required payments, and I think you see the bond holders as seeing this as close enough to a default. Is that right Sean?

    Overall, while I didn’t get to attend an Ivy League school I agree with you.

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