One of the sub-themes of the campaign that Republicans have nurtured in recent weeks is the idea that President Obama is a liberal freak who is so freakishly liberal he hates Bill Clinton. Mitt Romney has been lashing Obama as a Clinton-hater in recent weeks, and the meme gained unexpected traction when Clinton, followed by his former Treasury Secretary Larry Summers, endorsed a temporary extension of the Bush tax cuts. The apparent new Clintonian Third Way consensus is that we must extend the Bush tax cuts — all of them — for the sake of the economy.
“Even Bill Clinton came out for it, before he was against it,” says John Boehner. “It’s not often in Washington that you get a bipartisan decision,” said Republican whip Kevin McCarthy. “When you listen to former President Clinton, if you listen to Summers, if you listen to our speaker, if you listen to our leader — they are saying the same thing as the small businesses are across America.” Only that radical loon Barack Obama, it seems, would disagree.
In fact, Obama, Clinton, and Summers are all in total agreement on the economics, though slightly in disagreement on the politics, and Obama’s political disagreement with Clinton places him to Clinton’s right. Let’s walk through this.
All three Democrats, along with the majority of the economics profession, believe in a basic Keynesian framework. When the economy is severely depressed, the government should temporarily run large deficits in order to jack up consumer demand. If you believe in Keynesian economics, then the policy here is perfectly obvious. You want to increase deficits in such a way as to get consumers to spend the most amount of money. That means having the government directly purchase goods and services, and to cut taxes in a way to put money into the hands of people most likely to spend it.
Economists agree about this: Poorer people are more likely to spend their money than rich people. If you’re looking to create short-term stimulus, tax cuts for the rich are incredibly inefficient. (Republicans support cutting taxes for the rich because they think the rich deserve to keep more of their money, or because they think low taxes for the rich work as long-term policy, but nobody seriously advocates it as a Keynesian measure.) Obama, Clinton, and Summers all want to end the Bush tax cuts for the rich, pass a long-term plan to reduce the deficit, and also pass a short-term plan to goose consumer demand.
The catch is that Obama can’t get Republicans on any of this. Republicans only support long-term proposals to reduce deficits if they consist entirely of spending cuts and are paired with cuts to income tax rates. They’re willing to support short-term plans to increase the deficit only if paired with extensions of upper-bracket tax cuts. Since Obama believes long-term deficit reduction must include higher tax revenue collected from the rich, the two sides are at a total stalemate.
At the end of 2010, the Bush tax cuts were set to expire, and Republicans cut a deal. They agreed to support extending middle-class tax cuts and unemployment assistance, which Democrats wanted, in return for extending tax cuts for the rich, which they wanted. If Democrats didn’t agree to extend the tax cuts for the rich, Republicans would have let the other stuff expire, and the middle-class tax hike and cutoff of unemployment benefits would have taken a bite out of consumer incomes and slowed down the economy. At the end of the year, all those things expire again.
So the Democrats have to figure out how to deal with a world in which Republicans are forcing them to choose between their short-term goal of goosing the economy and their long-term goal of reducing the deficit. Clinton first suggested Obama should pay the Republican ransom — extending tax cuts for the rich that do little to increase short-term demand — in order to get more stimulative tax cuts for the middle class. Summers sort of hinted at that but didn’t reach a firm conclusion.
Obama says he won’t make that deal again. But note: Obama is placing the goal of long-term deficit reduction ahead of the goal of short-term stimulus. Obama knows that if he agrees to extend the Bush tax cuts, he’ll lose his leverage to force Republicans to make a deal on the long-term deficit. It may be an economically risky position, but it’s also, without a doubt, the more fiscally conservative stance.
