Obama {deals | caves} on tax cut extensions

[gonzomax]

The unemployed spend the money they get surviving. That spending causes demand for products, which does help the economy. It has a multiplier effect.
The tax cuts for the rich have been going on for a long time. As the rich get more and more , unemployment has soared. It is clear tax cuts to the wealthy do not result in job growth. But money = power. The power of the rich has soared. That is what this is about. The concentration of power and wealth in the hands of the few. They are in a position to grasp more power and are determined to do so.
Obama is selling out. It is short term thinking. A couple million people losing unemployment would be terrible for them. It would be good to help them. Letting them go broke would be bad for America. It would make us look cruel and uncaring.
But the deficits have to stop growing. Letting the entire Bush tax bill expire would drop the deficits about 25 percent. That is a great first step.

[Really_Not_All_That_Bright]

This is the worst of all worlds. I’m not a big fan of extending unemployment benefits, but I’m not against it necessarily. I am against extending the Bush tax cuts.

I disagree that the Republicans would have blinked first, though; if they were willing to block the extensions when they were the minority, there’s no reason they’d suddenly reverse course now.

[Whack-a-Mole]

@Really_Not_All_That_Bright

I disagree that the Republicans would have blinked first, though; if they were willing to block the extensions when they were the minority, there’s no reason they’d suddenly reverse course now.

[nitpick]
They are still in the minority. The new Congress has not been sworn in yet.
[/nitpick]

[pseudotriton_ruber_ruber]

I think he did it so that no Republican ever can label him a socialist again. Now that he’s cut a deal that includes tax cuts for the wealthiest 2%, the Republicans will have to offer him a contrite apology for mis-characterizing him the past two years and a vow to defend him against any future charges by demogogues that his program is a socialist one.

[TriPolar]

@Sam_Stone

This is pretty much the worst of all possible worlds:

• The unemployment extension doesn’t create jobs, other than in a Keynesian sense of pumping more money into the economy. It actually lowers job creation by providing an alternative to working for some, and by increasing the deficit, which is clearly a drag on the economy.

• Extending the tax cuts by two years won’t change business behavior. Temporary tax cuts don’t have the same effect as permanent tax cuts. No one hires permanent employees based on temporary windfall money.

• The social security tax cut only applies to the employees’ half, so it doesn’t lower the cost of employing someone. This was the only cut that had the potential of incentivizing business to hire more people, but they blew it. It’s also a tax cut aimed at only people who are currently employed, which makes any multiplier from it smaller than if the money went to truly idle resources.

But this is typical of how fiscal ‘compromise’ works in Washington. It’s like when a $70 billion dollar bill comes out of the House, and the Senate says it’s too expensive and produces a $50 billion version of the bill. So the two sides go into reconciliation to ‘compromise’ - and produce a $90 billion dollar bill. It happens all the time.

All that said, I don’t understand the complaint from the people who say more stimulus is needed. This is certainly a more effective stimulus overall than an equivalent amount of new spending would have been - the latest research is finding that tax cuts are more stimulative than spending in most cases. Now, I know that extending the cuts won’t provide additional stimulus, but it will prevent anti-stimulative pressure that would have swamped a spending bill. In other words, it’s more effective to leave tax rates where they are than to raise taxes by $50 billion to pay for a $50 billion fiscal stimulus.

From the Republican’s standpoint, this deal only makes sense if the negotiation included Obama dropping plans for another fiscal stimulus. But from the Democrat’s standpoint, that would make the deal even worse.

At least it’s better than allowing a major tax hike and blowing the money on fiscal stimulus. If that’s what the Republicans avoided, then good on them. But I suspect that’s not the case, and they were just single-mindedly willing to sign onto anything that prevented a tax increase.

Tax cuts are only an econonomic stimulus when applied to those who return the money to the economy. When the wealthy get tax cuts, their return increases without any effort, and they have less incentive to invest. The greatest stimulative effect of tax cuts comes from those who have to spend all the increased take-home.

Our economic solution is to return to what worked before. 90% top tax rate. Nobody actually paid that rate, because there were huge breaks for actually investing in the economy. Tax shelters gave us the strongest economy in history (not sure of the statistics there, so lets say a very strong economy). The abuses could have been fixed, but instead we shifted to a system where taxes dropped to the lowest levels in modern times, with no relation between tax rates and their economic benefit. Right now creating a job is a risk, eliminating a job returns a profit.

[Shodan]

Tax cuts are only an econonomic stimulus when applied to those who return the money to the economy. When the wealthy get tax cuts, their return increases without any effort, and they have less incentive to invest. The greatest stimulative effect of tax cuts comes from those who have to spend all the increased take-home.

I’m curious to find out what you think rich people do with their money - dig a hole and bury it in the back yard?

ETA - Sam Stone’s analysis of the deal is pretty much correct. If this is the sort of compromise we can expect over the next two years, better Obama should dig in his heels and insist on the most radical leftist agenda he can manage - nobody is going to go for that, and at least these kinds of deals which include the worst aspects of everyone’s position will be avoided.

Regards,
Shodan

[Squink]

@Bricker

Dan Rather, who was being interviewed by one network, was: “By this capitulation, Obama has guaranteed himself a strong primary challenger in 2012.”

I don’t see it. But I’ve been wrong before.

Obama vs Pelosi -> I’d go w Pelosi
Obama vs Howard Dean -> I’d go w Dean
Obama vs Jerry Brown -> I’d go w Brown

I doubt any of them will run.

It’s hard to see now what theme Obama can pick for his reelection campaign.
‘Hope and Change’ would be an obvious insult.
‘Not quite as bad as whatever crazy-ass Republican is running against me’ is not much of a turnout enhancer.
There’s not enough of a distinction between ‘the middle class is screwed’ and ‘the middle class is screwed, hard’.

[Wesley_Clark]

@Bricker

The President has apparently struck a deal with Republicans to extend the Bush-era tax cuts in exchange for the approval of unfunded unemployment extensions.

According to a couple of on-air commentators I heard this morning, as well as several commentators on these very boards, this is a terrible move for Obama, He should have fought this battle, and the GOP should have blinked first.

So, first: is that a strawman, or a fair characterization of opposing opinion?

And if it’s fair: given the results of the last election, is the underlying sentiment – that Obama could win on public opinion with a showdown on tax cuts – really realistic?

My view is: Obama’s move is the right one. But of course since I favor the tax cuts being permanent, that’s not all that persuasive.

That is a pretty fair assessment of the interpretation liberals and progressives have of this move. Obama made reducing income inequality one of the biggest cornerstones of his economic policy as a candidate. He has done a lot to achieve this (higher medicare taxes on the wealthy, payroll tax cuts, subsidies for the poor/working class, etc). But he ran over & over on ending the bush tax cuts on those making 250k or more a year. And he gave that up to pass unemployment extensions, something that historically hadn’t been controversial. When Gingrich shut down the gov Bill Clinton said in his bio that Gingrich was shocked, he thought Clinton would blink and give up. Clinton didn’t, but Obama does and will. So the GOP now know all they have to do is blackmail some group of americans (the unemployed, the economy as a whole, the disabled, etc) and Obama will give up.

Could Obama win on public opinion? I don’t know. I don’t think the GOP won in the last election cycle because the American public want hundreds of billions in tax cuts for the wealthy in a time of economic crisis (they won due to a variety of factors converging. Turnout discrepencies between the 2 parties bases, frustration with the economy, rejection of one party rule, etc). At the same time I don’t think most people pay enough attention or care to listen to the president’s messages anymore.

The tax cuts were originally passed when the economy was doing good. The debt was predicted to be eliminated by 2012 or so when the 2001 cuts were made. The situation in 2010 is the exact opposite.

Paul Krugman wrote about Obama’s willingness to give up on his principals to avoid short term pain, and wonders what this means when changes to medicare or social security come up. If the best the dems can do with 58 senators, the white house and 255 house members is to pass legislation that is the same that the republicans would have passed in 2001 then what does the future hold for politics?

I don’t know if it is fair since Obama has done a lot of good to reduce income inequality, but there is a vibe of ‘why bother’ among democrats when it comes to politics. The democratic party of 2010 generally has the same policies of the republican party of 1994.

[Rand_Rover]

Tripolar–ah, so correlation does equal causation in your world, got it. I suppose, using that same reasoning, you would agree that Obama has increased unemployment, lowered GDP growth, caused increased foreclosures, etc.?

[TriPolar]

@Rand_Rover

Tripolar–ah, so correlation does equal causation in your world, got it. I suppose, using that same reasoning, you would agree that Obama has increased unemployment, lowered GDP growth, caused increased foreclosures, etc.?

If those conditions persist for the next 10 years, yes. Correlation does not exclude causation either.

[Wesley_Clark]

@gonzomax

The unemployed spend the money they get surviving. That spending causes demand for products, which does help the economy. It has a multiplier effect.
The tax cuts for the rich have been going on for a long time. As the rich get more and more , unemployment has soared. It is clear tax cuts to the wealthy do not result in job growth. But money = power. The power of the rich has soared. That is what this is about. The concentration of power and wealth in the hands of the few. They are in a position to grasp more power and are determined to do so.

I believe every dollar in UI creates $1.60 in economic growth. Every dollar in supply side income tax cuts results in $0.30 in economic growth.

[Really_Not_All_That_Bright]

@Shodan

ETA - Sam Stone’s analysis of the deal is pretty much correct. If this is the sort of compromise we can expect over the next two years, better Obama should dig in his heels and insist on the most radical leftist agenda he can manage - nobody is going to go for that, and at least these kinds of deals which include the worst aspects of everyone’s position will be avoided.

You know this is a shitty plan when Shodan and I not only agree it’s shitty, but share the same reasoning.

[Lobohan]

@Shodan

I’m curious to find out what you think rich people do with their money - dig a hole and bury it in the back yard?

Regards,
Shodan

Rich people aren’t hiring people now because there is no demand. So they are sitting on their money.

Giving jobless people unemployment benefits allows them to spend money on necessities, increasing demand.

[Wesley_Clark]

@spazattak

I don’t understand this from the deficit hawk point of view… The Republicans main opposition to the unemployment benefits was that they were unfunded. Now their compromise is an unfunded tax cut plus an unfunded extension of unemployment benefits? How is that at all consistent and why is that not the story right now?

“The Deficit” is just code. Republicans, generally, don’t care about ‘the deficit’, they care about high taxes, social programs and infrastructure.

If tax cuts, esp supply side tax cuts, increase the deficit that is fine. If military action increases it it is fine.

If social programs increase it that is wrong. If infrastructure programs increase it it is wrong.

Basically, it is just a dog whistle term. The GOP is concerned about cutting taxes (esp supply side), reducing infrastructure spending and social programs. The deficit is just an excuse to do those things.

UI does more to grow the economy than supply side tax cuts (which arguably lowers the deficit). Doesn’t matter. Obamacare will cut the deficit by a trillion over the next 20 years. Doesn’t matter. Tax cuts grow the deficit. Doesn’t matter.

[Wesley_Clark]

@Bricker

One comment I heard hinted at a couple of times from the talking heads at CNN and MSNBC, respectively, and outright said by Dan Rather, who was being interviewed by one network, was: “By this capitulation, Obama has guaranteed himself a strong primary challenger in 2012.”

I don’t see it. But I’ve been wrong before.

If he does I wouldn’t be surprised if organized labor and progressive/liberal activists put a lot of their energy into his primary challenger. Those 2 groups tend to do a lot of the gruntwork of democratic politics.

But I have no idea who would challenge him and put up a realistic challenge from the left.

[Whack-a-Mole]

@Shodan

I’m curious to find out what you think rich people do with their money - dig a hole and bury it in the back yard?

Essentially…yeah.

Rich Americans Save Tax Cuts Instead of Spending, Moody’s Says

Give the wealthiest Americans a tax cut and history suggests they will save the money rather than spend it.

Tax cuts in 2001 and 2003 under President George W. Bush were followed by increases in the saving rate among the rich, according to data from Moody’s Analytics Inc. When taxes were raised under Bill Clinton, the saving rate fell.

<snip>

When tax legislation was signed by Clinton in 1993 – raising the top tax rate to 39.6 percent from 31 percent – the saving rate fell from 12.1 percent in the second quarter to 9.5 percent in the first quarter of 1994. The Standard & Poor’s 500 Index rose 1.9 percent from July through September, after little change the previous three months.

When the first Bush tax cuts were signed into law in June 2001, pushing the top rate down to 35 percent, the wealthy boosted savings. The saving rate climbed to 2.8 percent in the first quarter of 2002 from minus 2 percent in the second quarter of 2001. The increased savings coincided with a 1.1 percent decline in the S&P 500 index.

Second Round

After the second round of Bush tax cuts in May 2003, the rich also increased their saving, with the rate climbing to 7.6 percent in the first quarter of 2004 from 2.2 percent in the second quarter of 2003, the Moody’s data show.

The analysis found some similarities across income levels in the 2001 and 2003 data. The wealthy and the remaining 95 percent of Americans both saved more of their incomes after the Bush tax cuts. The saving rate is defined as personal savings as a percentage of after-tax income.

SOURCE: America’s Wealthy Save Tax Cuts Rather Than Spend, Moody’s Says - Bloomberg

[Dick_Dastardly]

@Sam_Stone

This is pretty much the worst of all possible worlds:

• The unemployment extension doesn’t create jobs, other than in a Keynesian sense of pumping more money into the economy. It actually lowers job creation by providing an alternative to working for some, and by increasing the deficit, which is clearly a drag on the economy.

• Extending the tax cuts by two years won’t change business behavior. Temporary tax cuts don’t have the same effect as permanent tax cuts. No one hires permanent employees based on temporary windfall money.

• The social security tax cut only applies to the employees’ half, so it doesn’t lower the cost of employing someone. This was the only cut that had the potential of incentivizing business to hire more people, but they blew it. It’s also a tax cut aimed at only people who are currently employed, which makes any multiplier from it smaller than if the money went to truly idle resources.

But this is typical of how fiscal ‘compromise’ works in Washington. It’s like when a $70 billion dollar bill comes out of the House, and the Senate says it’s too expensive and produces a $50 billion version of the bill. So the two sides go into reconciliation to ‘compromise’ - and produce a $90 billion dollar bill. It happens all the time.

All that said, I don’t understand the complaint from the people who say more stimulus is needed. This is certainly a more effective stimulus overall than an equivalent amount of new spending would have been - the latest research is finding that tax cuts are more stimulative than spending in most cases. Now, I know that extending the cuts won’t provide additional stimulus, but it will prevent anti-stimulative pressure that would have swamped a spending bill. In other words, it’s more effective to leave tax rates where they are than to raise taxes by $50 billion to pay for a $50 billion fiscal stimulus.

From the Republican’s standpoint, this deal only makes sense if the negotiation included Obama dropping plans for another fiscal stimulus. But from the Democrat’s standpoint, that would make the deal even worse.

At least it’s better than allowing a major tax hike and blowing the money on fiscal stimulus. If that’s what the Republicans avoided, then good on them. But I suspect that’s not the case, and they were just single-mindedly willing to sign onto anything that prevented a tax increase.

There’s mass unemployment right now and record numbers of applicants for jobs, are you seriously trying to claim that people aren’t working because unemployment benefits are available? What about the fact that there aren’t any jobs?

Is the deficit or the lack of demand a bigger drag on the economy? How much is the government currently paying in real terms to service its debt as opposed to say 2000, when interest rates were 6%? Was the deficit a bigger drag on the economy back then?
Businesses are as unconcerned about tax levels as they were in Reagan’s final years and less than during the 1990s boom. Businesses not hiring due to concerns about tax levels is just GOP propaganda. Here’s what businesses are concerned about, the fact that nobody is buying their stuff:

http://modeledbehavior.com/2010/09/17/sales-vs-labor-quality/

as the graph shows. So the big problem for business and the economy in general is lack of demand. Other than more government stimulus, how do you propose that we increase demand? Where is this research about tax cuts you speak of, from one of your right wing outlets perhaps?

[E-Sabbath]

@spazattak

I don’t understand this from the deficit hawk point of view… The Republicans main opposition to the unemployment benefits was that they were unfunded. Now their compromise is an unfunded tax cut plus an unfunded extension of unemployment benefits? How is that at all consistent and why is that not the story right now?

I’m not sure at all, and I’ve been very confused by this.

On the other hand, it does count as a new stimulus, which is what we kind of could use, according to Krugman.

Sometimes, when you lose, you win.

[Sam_Stone]

@Lobohan

I don’t suppose you have a cite from mainstream economists that show a general consensus about that point?

I’ve linked the relevant sites half a dozen times on this board in the past few weeks. Most of the latest research is finding multipliers from fiscal stimulus in the range of 0.2 to 1.2, and multipliers from tax cuts of 1.1 or greater. Of course, there are wide error bars around all of these estimates.

The Romer and Romer paper I’ve linked to multiple times found that exogenous tax increases of 1% of GDP resulted in a reduction of GDP growth of 3%. So these tax increases would have done more harm to the economy than the good that would have been done by a fiscal stimulus costing the same amount of money.

That’s the biggest argument for this plan - that tax increase in January, had it been allowed to happen, would have been a significant hit to the economy at a very bad time. Even Democrats agreed with that, and wanted to extend them except for the cuts on the rich. So it appears that the real compromise here was that the Reublicans got their tax cut for the rich, and in exchange Obama got even greater tax cuts for the working class to make the package more progressive.

Put that way, it’s not such a bad deal. Of course, the deficit is the hidden elephant in the room.

[Sam_Stone]

@Wesley_Clark

I believe every dollar in UI creates $1.60 in economic growth. Every dollar in supply side income tax cuts results in $0.30 in economic growth.

Cite?