Monday, December 17, 2012

Getting Somewhere?

Ezra Klein, who seems to have become some sort of backchannel negotiating instrument in the House Leadership/White House negotiations on the fiscal cliff, says "many think they can see the agreement taking shape". Who these "many" are is unclear, but let's just leave that aside.

Boehner finally went over the edge and proposed letting rates go up for households earning $1 million (it's worth noting that no report has clarified what the ultimate rate would be -- the Clinton top rate of 39.6%? something higher? lower?). Combined with the White House's deduction limitations, something which has been in every Obama budget, the revenue side of the equation produced over $1 trillion in revenue compared to ... well, I'm not sure, but I'm assuming compared to current policy. In exchange, Obama gets democrats to swallow the use of Chained CPI--which is typically lower than official CPI--for various government indexing, like tax brackets, Social Security benefits, and then replacing the failed supercommittee/sequester with two separate committees devoted to tackling spending cuts and tax reform separately, but without a punitive "sequester" that both sides want to avoid. On the stimulus side of things, existing unemployment benefits would be extended, as has been customary during long periods of unemployment up until Obama was president. There would be some "infrastructure spending" that might serve as another boost to demand. Let's take each of these in turn.

  • Tax rates. As I wrote this, someone leaked details of Obama's counteroffer, which makes the Bush tax cutes permanent below $400,000. It's nice to see that both parties are so concerned about the well-being of the upper-upper middle class, but whatever. Barry Ritholtz thinks this is a fine compromise, pointing out that $250K in 1993 is almost $400K in today's dollars. Well, it's $375K if you use Chained CPI. The end result would be that America would have seven marginal tax brackets, up from two during the late Reagan years. And the top bracket would now more clearly delineate "rich"; while I'm sure a married couple with two kids in private school and a home in San Francisco might feel middle class, you're a homeowner in San Francisco and you have two kids in private school, for fuck's sake. Still, I think it might be useful to tack on another bracket between what I'll call the "first world problems" income level and "seriously, I have no idea how to spend this much money in a year" level. California, New York City, and New York State all have brackets that start at either $1 million or $2 million, as do a number of other jurisdictions (Oregon, for one). So if we're only going back to 39.6% at the $400K level, let's push the rate up for households earning above $1.5M to a level that would make up at least half the revenue lost in the $250-400K gap.
  • Chained CPI. This technical-sounding change would result in small, slow cuts in social security indexing, which would affect the oldest, poorest seniors the most. If we had been on Chained CPI since 1980, average benefits for a 95 year old would be roughly $100-150/month lower than they are today. That's fine if you have other sources of retirement income, but for 30% of retirees, Social Security accounts for over 90% of their income. For 60% of retirees, the program is at least half their retirement income. The Obama counteroffer suggests including "protections for the most vulnerable recipients", so the devil is in the details on that one.
  • Stimulus. Obama wants to keep extending the long-term unemployment benefits, and get some infrastructure spending (maybe we can modernize the power grid and build the Keystone XL pipeline? Does that sound like a good trade?), but looks like he will give up the fight on the payroll tax cut. The payroll tax cut has been one of the more effective stimulus measures out there, and the White House has been looking for a replacement that might be more politically attractive, but hasn't found it yet. Call this one a mixed bag, though I have no idea how much better he could do.
Lastly, as Brad DeLong points out, it's not clear that John Boehner really speaks for his caucus. DeLong thinks this means that any negotiations between Obama and Boehner will be dragged to the right by Eric Cantor and many rank-and-file House Republicans. I'm not so sure. After all, at any point, Obama can walk away and the public appears ready to blame Republicans. Either Obama gets a deal that's palatable to him (and to enough House Democrats that the deal can get through the House with either a "center-out" coalition or "left-in"), and it passes, or the whole thing falls apart, Eric Cantor stages a coup, the government shuts down in April, and everyone remembers that Republicans hate government.
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