The President and his advisors have set a trap for the House Republicans. The President plans to ensnare them into voting for greater federal spending and wealth redistribution in return for extending the Bush era tax cuts. Republicans have already agreed to raise taxes on the upper 2% of income earners. The Speaker, at great political risk, acquiesced to the President’s original proposal to raise taxes about $800 billion over ten years on the wealthiest Americans. As a result, the fight is over the method: rate increases or closing loopholes. This tax increase of $80 billion per year cannot close the budget deficit which exceeds $1 trillion annually.
The President sent Secretary Geithner up to Capitol Hill to outline the administration plan. Senator McConnell broke out in laughter after hearing the White House plan; it is clear that the President is not offering a “balanced deal”. Three weeks ago, the President offered a similar proposal: An increase in taxes of $1.6 trillion over ten years, more stimulus spending for several years, a permanent debt ceiling increase, and unspecified and non-guaranteed cuts to entitlements amounting to $400 billion (which is less than the increase in spending). With time eroding before the January deadline, the President’s open gambit is an endgame.
The President hopes to split the Republicans, which has happened. He is not going to offer real compromise. Real spending cuts have never been his aim. Four years ago he told them that “elections have consequences” while meeting at the White House over plans for health care reform. Now Representative Nancy Pelosi has reaffirmed this admonition. Tax and spend politics has allowed Democrats to secure scores of interest group voters since the FDR days.
Some pundits advocate that the Republicans walk away and let the nation go over the fiscal cliff. Original concepts of this cliff included automatic tax increases and federal spending cuts resulting from the 2011 sequester agreement. Fears abound that this would put the country into recession and some advocate more intensive talks. Talks can occur when both parties are genuinely interested in compromise. Sadly, this is not the case.
Unemployment is sure to increase whether we go over the cliff or not. New taxes in Obama Care and a restoration of the total employee withholding for FICA payroll taxes (an increase of 2%) are coming. Layoffs and reductions in working hours resulting from businesses’ attempts to reduce overhead under requirements of Obama Care will reduce economic growth. The President has successfully decoupled tax increases from spending cuts in the electorate’s perception of the fiscal cliff. The House leadership can continue this decoupling since time and leverage are minimal.
A lesson can be gleaned from President Reagan when he refused to end defensive missile systems while meeting with Gorbachev at Reykjavik in 1986. Eventually Gorbachev agreed to missile reductions but not Reagan’s entire proposal to eliminate nuclear weapons. A compromise should not violate strong principles. The Speaker should not agree to any increase in spending that his caucus opposes. He can offer to extend the tax cuts for the 98% and negotiate the details of the increase. The President will blame the Republicans for any future problems regardless of agreement. After January 1, 2013 there is no guarantee that he will agree to extend the Bush tax cuts for anyone.
When the Bush era tax cuts expire, the tax rates instituted by President Clinton take effect. During the campaign Obama said that he wanted to hearken back to those days. He needs more revenue to close the deficit and keep Obama Care from devastating the gap further. The middle class will shrink either by loss of income or by higher taxes. The Republicans have no choice but to reduce taxes on the 98%, since he will not sign a bill he opposes. This will result in some reduction for the wealthiest since the lower brackets will be taxed at a reduced rate. If they walk away, then all rates increase giving the President more revenue, harming greater numbers of citizens.
However, the President intends much more: He wants to remake the national Democratic coalition for several generations. He has forged an alliance between unions, public sector workers, young unmarried women, minority ethnic groups, and younger voters through targeted government spending programs. He will endeavor to increase the numbers of dependent persons. He wants to transfer wealth from the producers to the indigent. Already some on the left are calling for wealth redistribution during his second term. Saul Alinsky, Karl Marx and Friedrich Engels would be proud.
Speaker Boehner can take a page from Speaker Tip O’Neill who stalled legislation that would help President Reagan. The next four years are going to be a political holding pattern. The economy will be flat during the period as taxes increase and many companies dump their health insurance plans. Employers will convert full-time employees to part-time as a way of avoiding the rules of Obama Care.
Boehner has a chance to forge a new coalition for the Republicans. Emphasis should be on the debt reduction for the next generation, which is an opening with youthful voters. Bankruptcy of the Medicare and Social Security systems is a consequence of underfunding and excessive spending. Blame can be laid at the President’s feet as he has spent these years creating a new health care system instead of repairing the existing ones. The rhetoric should be to “save” these programs.
The other aspect of the fiscal cliff is the spending issue. The agreement of 2011 to raise the debt ceiling has resulted in an automatic sequester of domestic and military spending amounting to over $1 trillion over ten years. The Republicans fear devastation to the military preparedness when additional $500 billion cuts delay weapon systems and deployment of forces. The President used this approach to guarantee cuts to the military that the Republicans would never knowingly approve. They fell into the trap he set in 2011. They cannot compound the insult with another mistake. Instead, use this opportunity to reorganize the Pentagon and reduce the numbers of civilian and uniformed bureaucracy, creating a leaner and more nimble planning structure. The Congressional power over the purse must be utilized to maintain the most effect force projection.
Other entitlement programs such as Medicaid, Food Stamps, and Aid to Dependent Families are safety nets. However, the constituency groups that support these programs generally vote for Democrats. The House should work to block grant these programs to the states depriving them of federal bureaucracy and cutting into their interest groups. This will give greater flexibility and reduce costs.
The Republicans can pass small pieces of legislation that improve the situation. If the Senate under Harry Reid’s leadership rejects these efforts, then continuing resolutions might include these changes. Continuing resolutions should be at 2008 levels, not present ones. The Senate has not passed a budget in three years to allow the President’s 2009 stimulus spending to continue unabated.
Speaker Boehner has an opportunity to expand the Republican coalition through programs aimed at specific interest groups as Democrats have done. These include saving necessary programs and cutting wasteful ones such as the Rural Electrification Program. Small ball is the approach to take when leverage is poor but offensive action is warranted.
Last year I wrote that the divided government offers few good choices. The media supports the President. The public voted for this division. During the past two years stalemate with the House opposing the President’s initiatives resulted in continuation in the 2012 elections. The Republicans can moderate, but this will lead to their defeat. Their supporters want to stall progressivism. It was the intent of the Constitutional framers that competition between the federalist parties would restrict growth of governmental power. This is how Madison, Jay and Hamilton envisioned the process.