The deal is out. Ezra Klein has details, and here is the New York Times. It strikes me as exactly what the administration was hoping to get. They had been pushing for this combination of a payroll tax cut and business credits since at least September, so a entirely tax-cut driven second stimulus package.
My initial thoughts on the deal:
1. No Raising of the Debt Ceiling. This should be a no-brainer and a deal-breaker for liberals considering supporting this bill. No Democrat should support this compromise without this issue being addressed. The debt ceiling is going to be hit sometime early next year, between February and April. Alan Simpson is already bragging about how this vote will be a “bloodbath”, forcing the austerity agenda into action. It would not surprise me if the new Congress moved to cut back on the stimulus program and force deep cuts at that moment when this new stimulus is getting going, and the idea that Obama will show leadership in averting this crisis can no longer be assumed.
Since this is a compromise, there should be no room for the GOP to turn around and slash aggregate demand a third of the way into 2010. This compromise gives cover for each side to extend deficits to benefit core constituencies. If the GOP comes to slash the budget (and of course leaving the high-end tax cuts in place), liberals will have been rolled. And Digby is already catching the pundits processing this deal by concluding that Obama needs to call for deficit cutting in the State of the Union, earlier than the debt ceiling issue. I could see 2011 being the year of a hundred little pay-freeze type moves, and the debt ceiling raising would be the focal point of it.
Since Obama is giving the Republicans exactly what they want, and they appear to seriously want it, this should be pushed to be included. Unless the administration wants to get cracking on Social Security, in which case a debt ceiling crisis is a perfect opportunity.
2. Repealing the Bush Tax Cuts: Gone, Goodbye. It is not very likely that the on the upper tax cuts will be pulled back in 2012. I simply don’t see a way in which the situation is any better then – unemployment is still projected to be at 8%+, with a fragile recovery still in its infancy. The idea that Obama’s team will be in any better position to trigger it then is weak. At that point, following the deficit commission, the idea will be lowering the tax rates and broadening the base, which means that we’ll probably be focused on lowering the high end marginal tax rates even further while removing subsidies. Except that I also expect those subsidies to be gamed.
Regardless, there is now much greater uncertainty than it was before, though the Financial Services Forum doesn’t think so. Huh.
3. Are We Starting the Deficit Commission Plan? Ever had a dinner that you thought was dinner, but the other person thought was a date? Does the deficit commission think we are on a date with this plan? I’m really worried that liberals will find themselves in the position that they’ve de facto signed up for the deficit commission’s recommendations by taking their first recommendation on the Social Security payroll tax cuts. Administration officials are already saying this is paid out of general funds, no need to worry. But I am worried.
4. Business Expensing. The business expensing are accelerated. My opinion on this is, following JW Mason’s reading of Goolsbee’s early research, is that this mostly shifts rents around rather than generates new demand. Goolsbee replied to that critique and the relevance of his early work at that link. I’ll leave it to you to determine your opinion.
5. Are Tax Cuts Extra Weak This Recovery? So tax cuts are a weak form of stimulus. And what is extra interesting is that this paper, Does the Effectiveness of Fiscal Stimulus Depend on How it is Delivered?, going off some survey data, found that people were less likely to “mostly spend” the 2009 tax cut as opposed to the 2008 one. 12% less likely, with 4% more “mostly pay debt” and 8% more on the “mostly save” category. The new social security cuts will replace this behavioral tax cut.
There’s debate as to why this is: some think that it involves the quirks of behavioral economics, where people think Obama raised their taxes instead of instituting the largest middle-class tax cut ever because Obama never told them. I think it is more likely to be involved with the large debts Americans took as a result of the credit bubble. If we had cramdown, so we had an impartial judge vetting out some of the bad mortgage debt that the bailouts should have taken care of, I’d be more comfortable with tax funds going straight to deleveraging. As it is, I’m less comfortable. (Felix: “But the middle- and upper-class tax cuts, paid for by extra borrowing by Treasury, will be used in large part to pay down personal debt. Essentially, we’re replacing private debt with public debt.”)
Rather than straight fund deleveraging, I’d rather see infrastructure get built. The new workers can pay down debt and we all get a public good out of the chaos. This is especially relevant since Wall Street seems happy to take the proceeds, park it at the Fed, collect money and give themselves bonuses.
6. Extending unemployment benefits is a smart idea. The latest and greatest numbers show that the increase in employment from the demand side outweigh the decreases in employment from the supply side, and that’s before you consider liquidity effects. If that is gibberish, extending unemployment benefits is a go on the economic arguments, even before you get to the issue that it is humane to not starve workers caught in the aftermath of a bubble consisting of Wall Street creating toxic debt instruments. This does nothing for the 99’ers though. And like the tax cuts, it doesn’t do as much as create new demand as maintain old demand; not stimulus, just anti-contractionary.
7. No Benefit From The High-End Tax Cuts. Don’t let anyone spin you. We’ll see unemployment come down somewhere between 0 and 0.1% from extending the high-end tax cuts. We are being asked to take on a massive deficit with nobody able to really confirm the net effect on employment is distinguishable from zero. That’s compared to the 0.2% to 0.5% for middle-class tax cuts.
I’m not sure what to think or to do next. Your thoughts?