Political Implications

Barack Obama has been reelected on a platform calling for a reduction in income inequality and a frankly liberal vision of government. He is only the second Democratic president since FDR to win a second term in office.

The GOP lost two seats in the Senate and eight in the House of Representatives, retaining control of the latter. While the GOP retained more House seats than would have been possible in the absence of extensive gerrymandering, their party has now lost the popular vote in five of the last six elections. Clearly, there is little to support claims that they have a popular mandate. However, many in the GOP still insist that there’s no need for them to change their political positions; rather, they need to improve their use of technology and present their message in a more upbeat fashion. Nonetheless, continued GOP control of the House means we can expect continued political polarization and paralysis, particularly since the GOP reaction to the election has been spectacular in its lack of self-reflection.

President Obama pledged in 2012 to end tax cuts for individuals making over $200,000 per year and households making over $250,000 per year. In the fiscal cliff negotiations recently ended, those limits were changed to $400,000 per year for individuals & $450,000 per year for households. This is seen by many on the left as a sign of Obama’s weakness as a negotiator.

Like many observers, Andrew Samwick sees the taxation part of the fiscal cliff deal as a failure of leadership:

As a matter of revenue, we now permanently have a tax system that will not raise enough revenue to cover our expenditures. As a matter of policy, we continued to constrain our choices based on whether some portion of legislation that wasn’t popular enough to pass initially without explicit sunsets should be continued or not. The proper course of action for President Obama was to allow all the sunsets to occur and then to force the Republicans to propose legislation to achieve their political objectives. Instead, he surrendered his political advantages and handed it to them without a fight. What an abject failure of leadership.

On the other hand, Obama was adamant in refusing to negotiate again over the debt ceiling and the GOP backed down, punting the issue down the road into March. It remains to be seen whether they will renew the fight over the debt ceiling at that point. Obama, as noted by Samwick, had maximum leverage at the end of 2012 because all the Bush tax cuts were scheduled to expire. Had that happened, Obama could have forced the GOP to put forth new tax cut legislation, which he could have been in a position to veto if it included tax cuts for those making over $200,000/$250,000 per year. However, it is not clear if the GOP would have made extension of unemployment benefits conditional on additional tax cuts or drastic spending cuts; nor is it clear that the Democrats in the Senate would have supported Obama’s stated position on taxes had tax cuts for the wealthy been included in a 2013 tax bill.

In addition, Obama forced the GOP, for the first time since Bill Clinton’s presidency, to accept an increase in taxes. He got an extension of unemployment benefits for one year, and he staved off GOP demands for sharp cuts in Medicare, Medicaid and Social Security.

What’s Next?

Robert Greenstein of the Center for Budget and Policy Priorities observes that the upcoming budget confrontations will likely be over additional deficit reduction measures embodied in the upcoming fiscal 2013 budget negotiations, sequestration, and raising the debt ceiling. The GOP continues to insist that any additional revenue be offset by additional budget cuts (with the exception, it seems, of the debt ceiling, which the GOP recently voted to suspend for the next three months and which they have stated will not be the focus of another budget showdown a la 2011). Greenstein predicts either a government shutdown or a constitutional crisis due to interparty conflict over the upcoming budget standoffs.

In addition to a debt ceiling standoff, the GOP temporarily abandoned the so-called “Boehner rule,” by which every dollar of new spending must be matched by a dollar of spending cuts, regardless of context. However, there is no indication as of yet that they will not return to it, a possibility that should concern us all.

As Robert Greenstein observes,

This rigid formula would require additional spending cuts in any year in which the debt grows in dollar terms, even if the debt is stable or shrinking in relation to the economy. Under the formula, programs that strengthen economic growth or serve low- and middle-income Americans could be cut to allow the debt ceiling to be raised, but savings from curbing special-interest tax breaks would not count for this purpose.

He notes that “The Boehner rule would require about $4 trillion more in program cuts over the next ten years than Bowles-Simpson” and would be even more drastic than the Ryan plan.

Yet austerity budgeting is already being tried in the UK and elsewhere in the Eurozone, yielding disastrous results. The results have so far included a double-dip recession in the UK, record unemployment in Greece and Spain, and other such miseries. This should not be surprising. Whether conservative ideologues like it or not, government programs are part of the overall economy; drastic cuts in funding to programs providing benefits to the elderly, the poor, veterans, etc., result in a sharp decline in the amount of money those recipients can spend. To put it very simply, the idea that cutting federal spending during an economic downturn will lead to a boost in economic growth is like telling farmers that their crops will grow faster during a drought if deprived of their supply of water.

Moreover, while it is undeniably true that the deficit and debt are very high by historical standards, the current historically low interest rates and inflation rate mean that there is no need to pay down the deficit and debt immediately. We clearly need to reduce both in the medium and long term, but there’s no need for the draconian cuts demanded by the GOP.

To this argument austerity proponents respond that we face a crisis–our high debt and deficits will turn the US into another Greece. Yet this claim doesn’t hold water. Greece is a small country, almost entirely dependent on foreign trade, where 51% of economic activity occurs on the black market, no one pays taxes, the national debt exceeds the country’s GDP, and unlike the US, Greece does not have its own currency (meaning it cannot make monetary adjustments to deal with its debt payments).  There simply is no comparison between Greece and the US.

If the GOP returns to such demands (and there’s no evidence to suggest otherwise), it will be imperative for people with progressive values to put maximum pressure on the parties involved to resist GOP efforts to use the budget imbalances they themselves created, to a great degree, as an excuse to hack away at government programs benefiting the most vulnerable among us. The sequester must be altered to avoid huge cuts to domestic spending. The debt ceiling must never again be an object of negotiation–in fact, it has no real function and should be repealed. And the fiscal 2013 budget, negotiations for which will start soon, cannot include drastic cuts to domestic spending. Underlying our opposition to such cuts must be the fact that in the current economic and budgetary context, there is no emergency.

The GOP will get three more bites at the budget cutting standoff apple in the next two months. Looming are (a) the battle over sequestration (just postponed by the fiscal cliff deal); (b) the need to raise the debt ceiling; and (c) the 2013 budget battle, which will start with the Continuing Resolution. Keep your powder dry–you’ll need it.