When Politics in America Works…
It really works… Adversarial politics sometimes produces what's best for the nation…
From Yahoo Images
Brass knuckles producing results?
The jury is still out, but things could end up working out fairly well.
Funding for a low-carbon transformation, infrastructure, poverty reduction, education and training, and critical basic research could be enacted at levels that don’t ruin America’s creditworthiness. Means-testing of programs could be approved.
This week Senate Minority Leader Mitch McConnell reportedly offered Democrats an option to raise the debt ceiling in order to avoid default. Democrats have indicated they might take him up on his offer: raise the debt ceiling by a dollar amount that buys them time till December to sort out their differences.
Democrats will then be able to pass Build Back Better (the $3.5 trillion spending plan, or some less costly version) through reconciliation. Mitch also “offered” Dems the option to scrap that enormous price tag and work with Republicans to pass bipartisan legislation, in addition to raising the debt ceiling. Unlikely.
Speaker Pelosi is a formidable legislative leader, as I have argued before. So is Mitch.
The Republican leader and his caucus, in addition to playing a high stakes power game, seek to check the Democrats’ worst excesses. These maneuvers follow, it is important to emphasize, the tough action on the part of Democratic moderates — from Manchin and Sinema in the Senate, to Gottheimer and Murphy & Co in the House. Their pressure may just get the exorbitant price tag of Build Back Better down — at least the president is quoting new numbers in the news.
This give-and-take — really, punch and parry — in America’s adversarial system, in contrast to the consensus-building seen in, say, the German system, does cause problems. Gridlock and polarization. Brinkmanship. But adversarial politics can sometimes produce results. Some might argue that was what the founders intended.
A civics lesson
Our system of checks and balances, of divided government, of multiple “veto players”, to use a poli sci term, whose approval is required step by step to get anything done, sometimes produces the optimal outcome.
Let’s go through the steps. Joe needs to hold Bernie close lest he have open rebellion in his Party. He has done this admirably well. But at great cost. Bernie “the 6 trillion dollar man” Sanders extracts a high price for his cooperation. He is the Chair of the Senate Budget Committee (!!) and he says that he is being reasonable by cutting his plan back from over one-quarter of GDP (the 6 trill) to 15%. These are large numbers, folks, both of them. But, it’s fully paid for, they say.
Giving Sanders and his followers what they want has kept progressives in Congress in lockstep (largely) with the White House. Moderate Democrats, by contrast, especially those in the House worried about losing their seats in 2022, want to get Build Back Better’s price tag way down and also show voters they can deliver on bipartisanship.
In the wake of the shaky Afghanistan withdrawal, the GOP for sure wants Biden to go from failure to failure, all the way until Nov. 2022. That said, Republican leaders also make the fair point that the Dems’ proposed spending spree is irresponsible.
In the Senate, Democrats need ten GOP votes in order to advance legislation that cannot be done by budget reconciliation, which requires only 50 votes with the vice president’s tiebreaker. This is why Mitch has dragged his feet on approving the debt limit hike, yes, giving the Democrats a hard time, his favorite pastime, but also sending a message on spending excesses.
The Dems could accomplish what they want by reconciliation but that takes time (which they don’t have as the debt limit could be breached by Oct. 18). Furthermore, they must keep moderate Senate Democrats, such as Manchin and Sinema, in line in order to get to 50. Both of them have talked about much lower numbers on Build Back Better.
In the House, Speaker Pelosi can’t afford to lose 6 Dem votes. So, she needs time to hash out a deal between progressives and moderates.
All this could lead to no Democratic achievements, true, or even to a disastrous debt default (unlikely, as both the Ds and Rs would pay for this in popularity). Or, this turn of events could just play right into Joe’s hands.
If one assumes that the moderate Democrat sitting in the White House, forced to play “muy amigo” with Bernie since the campaign trail, really wants a deal that does not bust America’s credit in the financial markets, then he might just get one. Biden indicated as much this week by quoting figures around the $2 trillion mark for his BBB.
Toward a sound fiscal policy
The Congressional Budget Office (CBO) has produced detailed options for America’s political leaders that would reduce the budget deficit. For America to be successful, it must not only rebuild infrastructure, confront climate change, and reduce inequality, but also roll out a medium-term fiscal consolidation plan that sets government debt on a downward path. Soon. Yet Bipartisan Infrastructure (BIF) and BBB together could bust the budget.
Without such a credible plan that keeps debt under control, we could see further ratings downgrades of U.S. treasuries. Ultimately, rising debt could trigger a crisis of confidence in the financial markets. See such a scenario in chart 1 below from a previous post that examined how Great Britain in the first half of the 20th century, the world’s leading economy like the U.S. today, squandered its position through a massive runup in government debt. By 2050, U.S. debt levels could reach close to the levels Britain saw as it went into a currency crisis in 1947.
The mantra of progressives regarding the size of BBB is that “it’s all paid for”. There is room to raise taxes in the U.S., yes, and to adjust the tax code to reduce inequality. The Trump-Paul Ryan tax cuts of 2018 benefitted the rich most (see chart 2 below), in a country already with an unequal distribution of income, among the worst in advanced economies.
Much of Trump’s meddling with the tax code could be reversed without harming U.S. competitiveness. That said, the expansion of government envisioned in the $3.5 trillion package requires a tax hike so large that it could jeopardize America’s favorable business climate.
The CBO’s options for cutting deficits include raising revenues and reducing spending. Means-testing government programs is a critical component.
In a paper I co-wrote, called Ten Point Plan: Strategic Planning for the U.S., we argued that U.S. taxes could rise a bit without jeopardizing America’s low-tax status. At ~30% of GDP, U.S. taxes could be increased to ~35%. This would raise nearly $1.2 trillion per year, and keep U.S. taxes in line with business-friendly Singapore, Switzerland and Australia. And, it would keep the U.S. tax burden well below that of Germany (47%), high-tax France (53%), and the median of AAA countries at Fitch (45%).
This modest boost to revenues envisioned in Ten Point Plan should adequately fund the most important initiatives in Build Back Better and the BIF, while contributing to deficit reduction. Ten Point Plan recommends introducing a carbon tax to price greenhouse gas emissions appropriately and improve the tax mix. And, by rigorously means-testing government programs to focus less on the middle class and more on reducing poverty, additional fiscal savings could be generated.
“Progressives” could be more progressive
“Progressive” is a misnomer for America’s progressives.
Progressive implies policies geared toward the poor in order to empower them with skills to increase earning potential, thereby reducing inequality. The proposals of “progressives”, led by Bernie Sanders, are skewed toward the middle class. Middle class programs are okay when you can afford it, but we can’t right now. U.S. government debt to GDP stands at ~130%, an historic high and over 60% of GDP over Germany’s ratio. Middle-class giveaways are popular and win elections, which is why they are enacted. But, the country could be put at risk by doing so right now.
Traditionally, American politics has required striking a bargain between the middle class and the poor in order to advance progressive legislation. Middle class support is locked in by coupling legislation that focuses on the poor and communities facing racial injustice with middle class goodies. This was how education reform was passed in 1965 — Title I funding for low-income schools, one of the largest items in the federal education budget, in exchange for college loans and grants, another large item which heavily benefits the middle class. Likewise, the farm bill combined food stamps with farm subsidies.
Build Back Better and the American Rescue Plan are no different. Child tax credits and the earned income tax credit directed toward the poor in exchange for $400 billion in rebates for the middle class.
Build Back Better — the $3.5 trillion version as it currently stands — could be pared back by means-testing programs so that they are better targeted to the poor: Medicare and other health care expansion, child care, housing, and community college and Pell grants, among other line items.
Who’s guarding the henhouse?
It is embarrassing that Bernie Sanders chairs the Budget Committee, quite frankly. I get it — he is the ranking Democrat, even though he is actually an Independent. As I said in a previous post: Sen. Sanders as Chair of the Senate Budget Committee is like “Senator Fox” being made Chair of the Senate Committee on the Health and Security of the Henhouse!
Recall that Bernie’s Medicare for All plan from 2016 was priced at ~$25 trillion over ten years. And, his overall economic plan, net of new taxes, was forecast to raise government debt by nearly $19 trillion, or over 80% of today’s GDP. Why would you have someone with this record run anything having to do with budgets?
Bernie began his tenure atop the Budget Committee earlier this year by advocating $6 trillion in new spending, and has come down to $3.5 trillion. Is there a way around seniority? Couldn’t Chuck and Joe cajole the good senator from Vermont to chair instead Energy & Natural Resources, Environment & Public Works, or Health, Education, Labor & Pensions, all committees he sits on? Competence and credibility on a subject should count for something. It does elsewhere in the world and in the U.S. economy.
Just sayin’…
But, even Bernie has played his role in this opera of punch and parry that could quite possibly lead to a good outcome for the American people.
Chart 1: U.S. debt could get close to U.K. financial crisis levels (1946–47)
Chart 2: IMF: “the net effect of the [Trump] tax policy change… provides greater benefits to those in the upper deciles of the income distribution.”
