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.
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.
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.