Budget Showdown

If the consensus reporting from Capitol Hill is correct, sometime in the next two days, Republicans and Democrats will agree on a deal that keeps the payroll tax cut in place, extends unemployment benefits (albeit with a gradual reduction in the length of benefits put into place) and, once again, protects doctors from a cut in their Medicare reimbursement rate. The unemployment benefits and the so-called doc fix will purportedly be paid for by a combination of wireless spectrum sales, tweaks to how much the federal government contributes to federal worker pensions, and cash carved out of the health reform deal.

The politics of this are a lot easier to figure out than the economics. Simply put: It’s a win for Obama. The White House avoids putting the brakes on economic growth by preventing an imminent tax hike and keeping the safety net more or less intact for unemployed workers. In the run-up to an election that may be largely decided by the performance of the economy over the summer, that’s huge. If Republicans, as some have suggested, wanted to tank the economy to ensure new occupants in the White House, this is not the way to go about it.

And as a bonus, at least for the moment, the White House has also managed to avoid another game of budget showdown chicken. That said, the House has yet to vote, and over the past two years we’ve  witnessed several occasions in which recalcitrant conservative representatives have torpedoed deals that were supposedly set in place. On the other hand, it’s possible that the negative political consequences of the 10 percent approval rating currently “enjoyed” by House Republicans is beginning to sink in.

Economically, the deal doesn’t do anything to additionally stimulate the economy, it merely keeps in place measures that have already been enacted. The maximum length of eligibility for unemployment benefits will gradually contract, a process that will cause hardship for workers who drop through the safety net. But macroeconomically speaking, the effect isn’t going to be that huge. Nor will the offsets that pay for the unemployment extensions and the doc fix add up to much in the way of contractionary austerity, though it certainly won’t be pleasant for federal workers who may end having to contribute more to their own pensions.

All in all, it’s kind of a wash. The White House avoids sabotaging the economy, the Republicans avoid making themselves any more unpopular than they already are. It’s a sign of just how dysfunctional Washington has been over the last couple of years that the absence of drama seems like a masterful political stroke by Obama. Maybe, as James Fallows suggests, he really is learning how to be president.

Public polling seems to indicate that the voters generally favor taxing millionaires more than they do the Republican policy riders. That would seemingly put President Obama and Congressional Democrats in a strong position. And on the surface, so far, it would appear that Obama has been playing his hand well — tightening his rhetoric on inequality, threatening to veto any bill that attempts to jam through the Keystone pipeline as part of a deal. But his actual position is weaker than it seems. The truth is that neither Republicans nor Democrats have the votes to pass their own dream legislation, so a compromise is inevitable. And that compromise, by definition, will include things that Democrats don’t like. Republicans won’t get all of their policy riders, but they’ll get something.

Obama has no real choice, because standing pat is not an option. Politically, Obama might gain by making the entirely reasonable argument that dogmatic obstruction by Republicans pursuing ideological goals doesn’t serve the country’s pressing needs. But if the payroll tax cut expires and longterm unemployment benefits aren’t extended, millions of Americans who are already struggling will take another hit. And that simply isn’t acceptable.

How exactly we will get to the endgame is impossible for anyone who is not privy to the negotiations that are undoubtedly going on between Congressional leaders right now to say. But the general outline, after a year of government shutdown and debt ceiling fights, is all too familiar. Mitch McConnell, Harry Reid, and John Boehner will continue to say mean things about each other. A series of futile votes will be held, supposedly to demonstrate what each side already knows — that neither party has the power to ram through its agenda. Tension will build — but the postponing of a vote on the “omnibus” spending bill necessary to keep the government operating past Friday adds the necessary deadline frisson to force some kind of resolution.

There will be a deal before Christmas. But how will we decide who “wins” at the end? Easy — just keep a close eye on how the payroll tax cut and unemployment benefit extensions are paid for. Most of the GOP policy riders will fall by the wayside; the true battle is whether the extensions get paid for at all, or whether funding comes from carve-outs out of Obama’s agenda. If there’s any kind of tax increase at all on the wealthy, that would be a win for Democrats, but don’t hold your breath. Because even if politically, Obama has a strong hand, pragmatically he doesn’t. There are more than enough Republicans willing to let the interests of working and middle class Americans take a hit if it means holding the line against higher taxes on the richest Americans. And if economic growth slows in 2012 as a result, that’s a bonus for the GOP, because the incumbent party gets the ultimate responsibility for that quagmire.

The advice from here? Turn off CSPAN and go do your Christmas shopping. This reality show needs to be cancelled.

The most obvious proof that investors aren’t really alarmed by the prospect that partisan political gridlock will continue as least until the end of 2012 comes from the bond market. U.S. Treasury yields fell again, probably because investors who are continuing to be spooked by Europe’s sovereign debt woes are looking once again for the safest place to put their money. Despite all its faults, the U.S. economy is still growing faster than Europe’s, and the prospect that we will default on our debts still seems to be much lower than the chances that Europe won’t fix its own mess.

But that’s not to say that there won’t be economic fallout from this not-so-epic fail. If no action is taken by the end of the year, both payroll tax cuts and extended unemployment benefits will expire for millions of beleaguered Americans. That’s the definition of anti-stimulus, hitting American consumers directly in the pocketbook. Tuesday’s unexpected downward revision of the third quarter GDP growth estimate from 2.5 to 2.0 percent — a definite wet blanket stifling the more optimistic perceptions of the economy that had been percolating in recent months — emphasizes the risk. According to various estimates, the expiration of the payroll tax cut and extended unemployment benefits will together cut another 1 percent or so off of GDP growth. That will put the U.S. economy back perilously near  a full standstill.

If it seems strange to be bemoaning a debt-reduction committee’s failure to extend a payroll tax cut and a social safety net benefit, both of which would obviously increase the deficit, well then, consider this: The biggest roadblock to getting a deal cut was Republican insistence on keeping all the Bush tax cuts in place. Indeed, the final GOP proposal actually pushed for lowering the maximum tax rate on the wealthy even further. But the long-term negative deficit reduction implications of keeping the Bush tax cuts in place for the wealthy dwarf the budgetary impact of the short-term measures that would help middle- and working-class Americans.

Tax cuts for the wealthy don’t give you as much stimulus bang-for-your buck (the rich are more likely to save their windfalls rather than spend them). So what this means is that the real impact of the supercommittee’s failure is that instead of providing short-term help to people who most need it, which would spur economic growth, Republicans have stood by their determination to keep tax cuts in place that will do the most long-term budget damage, while benefiting the people who least need it.

There’s no reason to be surprised by this outcome. But we can still get hopping mad about it, if we want to.