No Extension Better than Bad Extension

Dear Friends,

It looks like President Obama has caved in on the extension of the Bush tax cuts, and it is unclear what if anything he got in return.  Generally speaking when you do not fight for what you believe in, you put yourself at a huge disadvantage and you then have no bargaining power.  Unfortunately that is President Obama's approach.  We will have to wait to see the terrible details of whatever has been agreed to.  Then we can just hope that there are enough Democrats who just say no to the deal so that it will fall through.

Common wisdom is that it would be a disaster to have all the Bush tax cuts expire.  As with most common wisdom, it is wrong.  Please read Paul Krugman's column in The New York Times today (here).  Mr. Krugman argues that while it is not great to increase the taxes on the middle class in a weak economy, it is better to do that than to continue the tax breaks for the rich which will truly bankrupt the country and require significant reductions in Medicare and Social Security in the future.  Don't be fooled by the fact that the extension is temporary.  The Republicans will know that the Democrats will cave in and the temporary extensions will continue until the Republicans can make them permanent.

But while raising taxes when unemployment is high is a bad thing, there are worse things. And a cold, hard look at the consequences of giving in to the G.O.P. now suggests that saying no, and letting the Bush tax cuts expire on schedule, is the lesser of two evils.
Bear in mind that Republicans want to make those tax cuts permanent. They might agree to a two- or three-year extension — but only because they believe that this would set up the conditions for a permanent extension later. And they may well be right: if tax-cut blackmail works now, why shouldn’t it work again later?
America, however, cannot afford to make those cuts permanent. We’re talking about almost $4 trillion in lost revenue just over the next decade; over the next 75 years, the revenue loss would be more than three times the entire projected Social Security shortfall. So giving in to Republican demands would mean risking a major fiscal crisis — a crisis that could be resolved only by making savage cuts in federal spending.

Mr. Krugman goes on to refute the claim that the failure to extend the Bush tax breaks would be a disaster for the unemployment rate.

A few months ago, the Congressional Budget Office released a report on the impact of various tax options. A two-year extension of the Bush tax cuts, it estimated, would lower the unemployment rate next year by between 0.1 and 0.3 percentage points compared with what it would be if the tax cuts were allowed to expire; the effect would be about twice as large in 2012. Those are significant numbers, but not huge — certainly not enough to justify the apocalyptic rhetoric one often hears about what will happen if the tax cuts are allowed to end on schedule.

He finishes with some good advice for President Obama, and I would add for the Democrats in the House and Senate who may have to adopt the Republican approach to governing by blocking the extension for all.

So Mr. Obama should draw a line in the sand, right here, right now. If Republicans hold out, and taxes go up, he should tell the nation the truth, and denounce the blackmail attempt for what it is.
Yes, letting taxes go up would be politically risky. But giving in would be risky, too — especially for a president whom voters are starting to write off as a man too timid to take a stand. Now is the time for him to prove them wrong.

In case the number of dollars we are talking about for these tax cuts is mind boggling to you, the "By the Numbers" column in The New York Times yesterday might help.  Here it is:

What Else Would $60 Billion Buy?

By DAVID LEONHARDT

$60 Billion: The approximate amount that extending the Bush tax cuts on income above $250,000 a year — which Congress seems on the verge of doing — will cost a year, in inflation-adjusted terms. On average, the affluent households that benefit from these cuts will save $25,000 annually. What else might that $60 billion a year buy?
•As much deficit reduction as the elimination of earmarks, President Obama’s proposed federal pay freeze, a 10 percent cut in the federal work force and a 50 percent cut in foreign aid — combined.
•A tripling of federal funding for medical research.
•Universal preschool for 3- and 4-year-olds, with relatively small class sizes.
•A much larger troop surge in Afghanistan, raising spending by 60 percent from current levels.
•A national infrastructure program to repair and upgrade roads, bridges, mass transit, water systems and levees.
•A 15 percent cut in corporate taxes.
•Twice as much money for clean-energy research as suggested by a recent bipartisan plan.
•Free college, including room and board, for about half of all full-time students, at both four- and two-year colleges.
•A $500 tax cut for all households.

Thanks for reading and please comment,
The Unabashed Liberal