We will see what the president has to say in Cleveland on Wednesday–according to the Washington Post, he will pitch the R&D tax credit but no payroll-tax holiday: all told, a non-proposal, stimulus-wise. His speech on Monday already said, in effect, that he is giving up the effort to pass another stimulus. The Labor Day address called for $50bn of new spending on infrastructure, but over six years, and the plan “will be fully paid for”, presumably meaning no increase in the budget deficit. It is a non-starter in any case, of course. But the messaging was revealing. The word “stimulus” was never mentioned.
This is a great mistake, as I argued here. The economy needs another stimulus, and can afford it. But Obama has decided that politics rules it out. He is in campaign mode, praising unions and beating up Republicans, evidently calculating that getting out the base is what matters. Meanwhile, economic policy is on hold.
Is there an alternative? I believe so, and made the case for it in the article I just linked to. A stimulus based on temporary tax cuts–extend all the Bush changes for two more years, and combine it with generous payroll-tax relief–would be difficult for the Republicans to block. Including an extension of the Bush tax cuts for high-income households alongside those for the middle-class might make the package less cost-effective in fiscal terms, though this is not clear. What is clear is that extending all the cuts would deny the Republicans their favourite excuse for saying no: “It’s a tax increase.”
Politically, the downside for the Democrats is obvious: failing to raise taxes on households making more than $250,000 would be seen by the Democratic base–which Obama is now trying to energise–as a victory for Republicans and another sell-out by the administration. For many of these Democratic voters, raising taxes on the rich is not mainly a way to raise revenue, it is an end in itself; and for a few I sometimes think it may be the most important goal of policy, bar none, regardless of the consequences. My guess is, if Democrats could only suspend their zeal to punish high-income households, they could put Republicans on the spot and get a second stimulus through. But they can’t. It’s the principle of the thing.
Read Peter Orszag in the New York Times. He is making a similar argument.
In the face of the dueling deficits [short-term and long-term], the best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.
Great column, and I agree with every word.