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Handicapping the deficit under divided government

4371410550_585c061ef7.jpg

If Republicans take the House, how much likelier is a full extension of the Bush tax cuts? I'd say the odds that the cuts for income over $250,000 remain in place for at least a few more years go up by at least 50 percent, and if those cuts are extended once, I think it's also likelier that they get extended again.

If Republicans take the House and the Senate, how much likelier is a full extension of the Bush tax cuts? I'd say it goes up to 70 percent, and the only reason I don't say 100 percent is that President Obama has more incentive to pick a fight with Congress. Nevertheless, the compromise will almost surely include a temporary extension of the tax cuts for income over $250,000.

Now, if Republicans take the House, how much likelier is a deficit-reduction deal that increases revenues or cuts spending by at least $700 billion over the next 10 years, thus making up for the tax cuts? Maybe 10 or 20 percent? And I think I'm being generous here.

What if the Republicans take the Senate, too? I'd think the chances might actually go down, as Obama would need to fight on behalf of his base if he's going to remain viable for 2010. You might see some changes made to Social Security, but nothing on the order of $700 billion over the next 10 years.

When you get concrete, in other words, it's much easier to see how divided government worsens the deficit and very hard to see how it reduces it. The vehicle for worsening the deficit already exists and has Republican support. The vehicle for reducing the deficit doesn't. And that's before we talk about health-care reform, where Republicans have supported both repeal and, more specifically, repeal of the bill's cost controls, either of which would worsen the deficit picture further.

That, anyway, is where I'd put the odds. For those who disagree, what are the deficit-reducing bills divided government will pass that will have more impact on the deficit than the tax cuts (and, if you think it'll happen, repealing health-care reform, which CBO says will worsen the budget outlook)?

Photo credit: White House.

By Ezra Klein  | October 26, 2010; 10:28 AM ET
Categories:  2010 Midterms, Budget  
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Comments

Ezra, giving Republicans any kind of power will make higher deficits more likely because that is what Republicans want. Their entire strategy for the past twenty years is to drive the deficit up by lowering taxes for the wealthy elite while at the same time increasing the military budget and funneling money to their corporate sugar daddies. That way pressure continues to build to cut social services and government programs for the middle class. It is a cynical ploy, but as we have seen, Republicans are more than willing to hurt our country in order to get their ideological desires achieved.

http://www.winningprogressive.org

Posted by: WinningProgressive | October 26, 2010 10:48 AM | Report abuse

I continue to nurture the fantasy that the Republicans will extend all of the Bush tax cuts and Obama will veto.

Posted by: bgmma50 | October 26, 2010 10:53 AM | Report abuse

Obama doesn't pick fights over anything. Haven't you noticed?

He gives the GOP everything they want and then waits for them to be nice to him. It's rather like the relationship between that whale and the ground in the Hitchhiker's Guide to the Galaxy.

Posted by: pj_camp | October 26, 2010 10:59 AM | Report abuse

Maybe the confluence of the Tea Party movement and the debt commission will put pressure/give cover to the GOP to sign on to some debt reduction measures, e.g. changes to Social Security and controls on discretionary spending once the economy picks up. But it's tough to see how the 2 parties will agree on containing health care costs when they have such different visions on how to get there. Applying the lever between insurance companies and providers, as the Dems tend to do, is considered rationing by the GOP, and applying the lever between consumers and insurance companies, as the GOP tends to do, is considered by the Dems to put too much risk on consumers.

Posted by: jduptonma | October 26, 2010 11:29 AM | Report abuse

If healthcare reform taught us anything, it's that backroom deals, partisan haggling, and strong messaging all take a backseat to whether 50 or 60 Senators actually want to pass a bill on substantive grounds. That's reassuring in some sense.

As far as the deficit is concerned, that's not so reassuring, because Republicans Don't Care About the Deficit (TM - Matthew Yglesias). Under their watch, with favorable economic circumstances of a massively inflating real estate bubble, the deficit grew. No amount of talk now about deficits makes up for the fact that they chose not to do anything about it when they were in power.

In a Senate with more Republicans, deficit reduction is less likely, because Republicans Don't Care About the Deficit.

Posted by: CarlosXL | October 26, 2010 11:40 AM | Report abuse

"it's much easier to see how divided government worsens the deficit "

But let American Public experience how deficit deteriorates with GOP again if not entitlement. We are 2004 redux - knowing Iraq war was wrong, we elected Bush; drained 1 Trillion dollars and ever since never got out game right.

Bin Landen in the end is achieving his goal of pulling down America.

Posted by: umesh409 | October 26, 2010 11:41 AM | Report abuse

Awesome

We get several years of Republicans COMPLETELY unable to explain how we would pay for the tax cuts

People will ask them and get things like "It is our money so...uh...we dont have to pay for it"

Huh?

Posted by: Bious | October 26, 2010 12:00 PM | Report abuse

One scenario where divided government reduces the deficit would be no bills get passed, and the government is by continuing resolution which seems to do a pretty good job at controlling spending growth.

If 41 Democratic Senators manage to get together and filibuster an extension of all the Bush tax cuts, then that also goes a long way to fixing the revenue problems. That requires them to take a stand on principle though.

From your retrospective yesterday:

"If we don't fight hard enough for the things we stand for," he said, "at some point we have to recognize that we don't really stand for them." - Paul Wellstone

Regardless, the fact remains that the only time we've had a balanced budget in the last 50+ years was with divided government where the Democrats initially raised taxes (93-94), then the Republicans wouldn't let them spend the money.

Posted by: jnc4p | October 26, 2010 12:02 PM | Report abuse

What about rolling back some of the spend side of ACA (without rolling back the tax side- which was needed to pay for what we already have)? If we can modify the various health insurance and free care schemes to work like high deductible HSAs, we could actually have a functioning market and cut the costs of health care for everyone. That alone would be a huge social good, instead of the subsidized monstrosity we are in the midst of expanding.

Hopefully all of the tax cuts expire. Over 250k only is class warfare.

In any case, having anyone in there that avoids a repeat of Smoot-Hawley is key. The anti-trade forces are very strong, and we must stop Obama before he sends us the world into a real depression.


Posted by: staticvars | October 26, 2010 12:09 PM | Report abuse

I will be happy if the next House actually PRODUCES a budget, whether or not the deficit gets reduced! It's simply stunning to me that the country is not chasing Pelosi and her leadership out of the country after such an utter failure.

Since the only time in my life when our budget was actually balanced occurred when we had a Republican Congress and a Democratic President, I'm inclined to take my chances! Of course, Obama is no Bill Clinton, so I expect he will not have the sense to go along and compromise on spending and limited tax cuts with the Republicans. Instead, he will fight and agitate and make a lot of speeches calling Republicans heartless killers, because that's all he knows how to do.

Posted by: kkinney01 | October 26, 2010 12:19 PM | Report abuse

Well, fortunately when Republicans run deficits it is good for the country. It's only bad when Democrats do it, as everyone of course knows already.

Posted by: klautsack | October 26, 2010 12:23 PM | Report abuse

I certainly hope the Bush tax cuts for people making over 200k continue. These are the people who invest in the market in taxable accounts. I'm not rich myself, but as a 68-year-old retiree, most of my income comes from cap gains and dividends. If the "rich" shift to munis and life insurance and abandon the stock market, I will suffer a significantly negative impact as will many other "non-rich."

Posted by: jibe | October 26, 2010 12:24 PM | Report abuse

I hope that President Obama will veto the Bush tax cut for the top 2%. While the votes in Congress may be there to vote for them, I don't think there are enough votes to override a veto. Obama needs to get serious with the Republicans immediately. Start with this.

Posted by: JimHannan | October 26, 2010 12:26 PM | Report abuse

I hope that President Obama will veto the Bush tax cut for the top 2%. While the votes in Congress may be there to vote for them, I don't think there are enough votes to override a veto. Obama needs to get serious with the Republicans immediately. Start with this.

Posted by: JimHannan | October 26, 2010 12:27 PM | Report abuse

The Democrats would be idiotic to acquiesce to tax cuts and then get blamed in the next election for the resulting deficits. That has been the pattern for decades, and now it will finally destroy them as a party.

Destroy the GOP instead. Drive a wedge between the mainstream Republican leadership and their voters.

Demand that the Republicans don't get any tax cuts, unless they put the matching long-term spending cuts in the SAME Congressional bill. So everybody can see what they are planning to trade off. Because tax cuts don't pay for themselves.

Posted by: Lee_A_Arnold | October 26, 2010 12:29 PM | Report abuse

"When you get concrete, in other words, it's much easier to see how divided government worsens the deficit and very hard to see how it reduces it."

Based on the above statement, I assume that Klien believes that the huge deficit increase of the past two years resulted from a "divided government" - i.e, a handful of Republicans against a super majority of Democrats in both houses and the White House?

Posted by: w_stricklin | October 26, 2010 12:31 PM | Report abuse

IF Obama can't gain support in Ohio (a state he must win in order to win the 2012 election), he might begin to realize he's a one-term President & therefore stop campaigning for himself -- opening up a greater possibility for fights with Congress. As long as Obama believes he has a viable chance for a second term, however, he's less likely to fight Congress and be the sort of veto-wielding "obstructionist" that wouldn't play well to the 2012 voting audience.

Predictions will be easier once we see what Congress does regarding the union problems. Currently, in states without right-to-work laws, a person who holds a union-controlled job must pay union dues, a portion of which are then funneled into electioneering efforts: this has the effect of forcing patriots to financially support candidates espousing unpatriotic views. If the "Employee Free Choice Act" is reintroduced by the 112th Congress in a form including a national right-to-work amendment, the whole ballgame changes; likewise, if the "DISCLOSE Act" is reintroduced including provisions to bar unauthorized transfer of union dues and/or to require citizenship verification from donors, the whole ballgame changes. Reusing the titles of popular bills is likely to be a handy tactic.

Having said all of that, the comment from staticvars above offers an interesting proposal. There is ample wiggle room in most legislative initiatives... the trick is getting BOTH sides to wiggle at least a little. Proposals to control union dollars and proposals increasing states' rights (particularly states' rights over deficit spending) are likely to make both sides do some rapid wiggling.

Posted by: rmgregory | October 26, 2010 12:37 PM | Report abuse

damn ezra, aren't you mr happy fun guy today :)

Posted by: eriklontok | October 26, 2010 12:40 PM | Report abuse

The reality is that the Democrats can barely get legislation passed on their own today. Almost certainly the election will reduce the Democrats strength some. Given the effective need for 60 votes in the Senate and the President's veto power, there is no possibility of the Republicans having enough power to move legislation on their own. So the more or less inevitable consequences of the election will be that support from both parties will be needed for any new legislation. Extension of the Bush tax cuts is probably a given. Hopefully, it will be only a temporary one. At least three issues seem likely to be subject to major struggles over the next three years. One is what to do about the structurally unemployed. The total non farms payroll includes fewer employed people today than it did in 2000. About one third of US manufacturing jobs were lost during the last decade. They were lost steadily. Not just in the recent financial system collapse. Termination of long term unemployment benefits is going to mean a big human problem and there is likely to be a large disagreement about what to do about it. The second is the fiscal crises of state and local governments. The fiscal condition of many states and local governments is going to lead to a bitter fight between tax payers, often unionized government workforces, and those who depend on government benefits. Resolution of these problems will probably be even more difficult than resolution of the bad mortgages because there does not seem to be any established legal framework for resolving the legal commitments of effectively bankrupt state and local governments. There will certainly be pressure for some kind of federal government bale out. Most likely the Republicans will block it. The third is the need for some kind of additional government stimulus of the economy. Possibly the Republicans will be willing to go along with some kinds of tax incentives for more hiring. But, most likely, the dominant theme of the next two years will be inaction by the federal government while we see what happens as the problems are forced to take care of themselves as best they can. That process probably is needed in any case to clear away the wreckage of the 2008 financial collapse. But it probably will not fix the underlying longer term US economic problems. The 2012 election will resolve whether people are satisfied with the result or ready for another round of a more active government policy in addressing the major economic problems that are likely to remain.

Posted by: dnjake | October 26, 2010 12:41 PM | Report abuse

"When you get concrete, in other words, it's much easier to see how divided government worsens the deficit and very hard to see how it reduces it."

You're showing your VERY young age & lack of poly-sci EDU Ezra. When was the last time there was even a hint of a balanced budget? What was Leg/Executive configuration.

Geez, at LEAST crack a recent history book one every year.

Posted by: illogicbuster | October 26, 2010 1:13 PM | Report abuse

Under present conditions -- conditions which are likely to continue for the foreseeable future -- the way to "worsen" the deficit would be to attempt to shrink its size.

That attempt will "worse" the deficit, not by increasing it (it will remain about the same size in relation to GDP) but by shrinking it relative to potential output, thereby making fiscal policy a greater drag on the economy.

The fact that a prominent progressive blog is giving respectful attention to the 'problem' of 'worsening the deficit' is a measure of how badly progressives are stepping on their own message in the run up to this election.

Posted by: amileoj | October 26, 2010 1:24 PM | Report abuse

Here is some good information I got from Google re historical federal taxes: Starting with Harding's election in 1920, here are the highest/lowest marginal tax rates (percent) at the time each president was elected. So, the rates may have been set by the previous administrations: Note, that I have added the last column to indicate if the deep South voted red or blue.

1920 Harding 58/4 percent, blue
1924 Coolidge 46/2 , blue
1928 Hoover 25/1.5 , blue
1932 Roosevelt 63/4, blue
1936 Roosevelt 70/4, blue
1940 Roosevelt 70/4, blue
1944 Roosevelt 94/23, blue
1948 Truman 91/22.2, blue
1952 Eisenhower 92/20, blue
1956 Eisenhower 91/20, blue
1960 Kennedy 91/20, blue
1964 Johnson 77/16, red
1968 Nixon 70/14,Gold(Supported Wallace)
1972 Nixon 70/14, red
1976 Carter 70/14, red
1980 Reagan 70/0, red
1984 Reagan 50/0, red
1988 Bush I 33/15, red
1992 Clinton 31/15, red
1996 Clinton 39.6/15, red
2000 Bush II 39.6/15, red
2004 Bush II 35/10, red
2008 Obama 35/10, red

Remember, the rates were set by the previous administration and are for the year of election; not when they took office.

Posted by: LL314 | October 26, 2010 3:02 PM | Report abuse

On my last post, the South has some blue because of Carter being from Georgia.

This morning on c-span Washington Journal several Republican and/or tea party types said that cutting taxes for the rich would result in lots more jobs.

History hasn't shown that to be true. And if it was true, the jobs would likely go over seas.

I remember driving to Washington State in 1948. Roads were narrow and dangerous at times. Lots of head on collisions in those days according to statistics. Eisenhower built the Interstate highway system in those days with a very high marginal tax rate. Today, the tax rates are too low to even maintain the highway system with all its bridges that may be ready to collapse.

Myself, I don't know any people that make 250K per year in my community. I could live very good on that amount of money. Two of my children are senior engineers and neither of them make more than 125K.

Remember, the 250k threshold that the president wants applies to all tax payers; even the rich. Only the excess above 250K for married couples would get the higher tax rate of 39.6 which was set by Pres. Clinton's admin. And he actually cut the debit some.

Posted by: LL314 | October 26, 2010 3:21 PM | Report abuse

I will admit that when Reagan got the tax rate to 50% for the top marginal rate, that was good because we had built the interstate highway system, Grand Coulee Dam and other big dams and we were on our way. But when the rates went to the low 30s that was way too low. It took Clinton to get us out of the ditch by raising the rates to 39.6 percent and if you check, the lower rates were raised also. But times were fairly prosperous because we paid our way.

Then we made a mistake of going to war and cutting taxes at the same time. Of course war is a bit of stimulus if the work is done in the US. But the NAFTA (a Republican program) was signed by Bill Clinton and that is where the sucking sound going south and then to other places started taking us down.

Republicans now blame Pres. Clinton for NAFTA but he was just trying to appease the Republicans which didn't work, because they never learned to like him. But voters did. Pres. tried to appease the Republicans, but they were in their 100/0 voting routine. If they had voted 70/30 with the President, I might have voted for one of them.

Posted by: LL314 | October 26, 2010 3:36 PM | Report abuse

LL314-
"Of course war is a bit of stimulus"

The very, very cynical part of me thinks Bush was a little too eager to go to war for this very reason. There isn't any other federal spending endeavor that gets support from fiscal conservatives like a good war now and then. (more now than then).

Posted by: klautsack | October 26, 2010 4:00 PM | Report abuse

Ezra, Republican leadership has already come out saying tax cuts never, ever need to be offset. Tax cuts are ALWAYS deficit reducing.

Soon after Republicans retake the Senate and / or House, I expect Glenn Beck to hammer that point home. The tea partiers will follow suit and start squawking about the need for deficit reduction through greater tax cuts.

Posted by: will12 | October 26, 2010 4:37 PM | Report abuse

War isn't stimulus, it's a broken window.

Posted by: justin84 | October 26, 2010 5:05 PM | Report abuse

How to pay for the tax cuts?
Eliminate the agencies/programs that those taxes would have funded.
I would start with Nixon's EPA, and Carter's DOEs(both of them)
Just the revenue from the held-up investments in energy projects, that have been stalled in the court systems around the country for decades, would pay off a lot of debt.

BTW, Clinton reduced spending, and the size of the federal government. His tax increase actually reduced from the amount of revenue that would have been collected otherwise.


Posted by: MrMeaner | October 26, 2010 8:25 PM | Report abuse

w_stricklin: "I assume that Klien believes that the huge deficit increase of the past two years resulted from a 'divided government' - i.e, a handful of Republicans against a super majority of Democrats in both houses and the White House?"

Why would one assume that? Isn't it obvious that much of the deficit increase over the past two years is due to an economic collapse and a resulting reduction in revenue that would have happened regardless of whether there was divided government or not?

The data show that very little of the deficit has to do with spending increases over the last two years. Just check out David Leonhardt's article: http://www.nytimes.com/2009/06/10/business/economy/10leonhardt.html

Correlation is not causality--and it applies to the last time there was deficit reduction too in that divided government did not necessarily cause surpluses to appear, or even if it did it might not happen again in a divided government with different factional political priorities.

Posted by: dasimon | October 26, 2010 9:58 PM | Report abuse

MrMeaner: "Eliminate the agencies/programs that those taxes would have funded.
I would start with Nixon's EPA, and Carter's DOEs(both of them)
Just the revenue from the held-up investments in energy projects, that have been stalled in the court systems around the country for decades, would pay off a lot of debt."

Really? Have you done the research and looked up how much money that would save? I suspect it's not enough to make hardly any difference in the overall deficit numbers. To balance the budget without cutting entitlements, defense, or debt service would require eliminating the entire rest of the federal government, not just a few departments and a few projects.

"His tax increase actually reduced from the amount of revenue that would have been collected otherwise."

That's speculative. Many people believe that by getting the deficit under control, he produced low interest rates which spurred the economy and generated the revenues that resulted in budget surpluses. That would never have happened without the 1993 tax increases (which, one may recall, conservatives decried as likely to kill off a delicate economic recovery).

Posted by: dasimon | October 26, 2010 10:03 PM | Report abuse

Assuming the Republicans take over the House, Obama should simply say that he will veto ANYTHING that increases deficits. After all, he wouldn't want his Republican friends to be condemned to eternal hellfire for rank hypocrisy, now would he?

If the Republicans feel it is super dooper uber important to extend the tax cuts for a year or two, which is an argument I could buy, let them suggest future tax INCREASES or concrete spending cuts to offset. And nothing beyond a five year time-frame counts.

Posted by: brickcha | October 26, 2010 11:13 PM | Report abuse

Assuming the Republicans take over the House, Obama should simply say that he will veto ANYTHING that increases deficits. After all, he wouldn't want his Republican friends to be condemned to eternal hellfire for rank hypocrisy, now would he?

If the Republicans feel it is super dooper uber important to extend the tax cuts for a year or two, which is an argument I could buy, let them suggest future tax INCREASES or concrete spending cuts to offset. And nothing beyond a five year time-frame counts.

Posted by: brickcha | October 26, 2010 11:14 PM | Report abuse

http://www.cbo.gov/doc.cfm?index=2864&type=0

Don't you find it odd that Clinton's economic success coincided with his reducing the federal workforce? When federal hiring began to increase at the end of his 2nd term, strangely we went in to recession.
What happened to stop the recession?
Was it the Bush tax cuts?
Why yes, I believe it was.
And if Bush had been a conservative, rather than a moderate progressive, he would have offered spending cuts, rather than use the revenue from the tax cuts to start even more govt. programs that have to be funded every year.

This is not a new phenomenon.
It was once considered an established economic principle.

http://www.humanevents.com/article.php?id=39573

Posted by: MrMeaner | October 26, 2010 11:26 PM | Report abuse

MrMeaner: "What happened to stop the recession?
Was it the Bush tax cuts?
Why yes, I believe it was."

Believing something doesn't make it a fact.

Usually, recessions are followed by strong recoveries. But even with W's tax cuts, growth was anemic. Job creation was slow, and median income barely budged--despite the claims of supply siders that tax cuts always lead to strong growth. Most of the income gains went to the top 10% of earners, and most of that went to the top 1%.

One can easily believe that what "stopped" the recession was the natural business cycle, and that tax cuts had little to do with it. Again, correlation is not cause. Otherwise, I can credit Clinton's tax increases for the above-average growth during his time in office, which flatly contradicts the supply-side argument.

Posted by: dasimon | October 26, 2010 11:51 PM | Report abuse

Two Points - Lowering rates increases revenues. Progressives don't like lower rates because they can't control the spending. Progressives like to "channel" investment.

The main reason that divided government reduces the cost of government is that we are much more likely to get involved in new foreign armed conflict under united government than divided government: George Bush in Irag and Lyndon Johnson in Vietnam to name two. We avoided war in Eastern Europe under Clinton because the Republicans had no stomach for fighting in Bosnia. Reagan cut losses in Lebanon when the terrorist attack hit the marine barracks because he had to deal with Tip O'Neil and the Democratically controlled House.

The Defense Department is the loser under divided government and that is a good thing.

Posted by: tshehan | October 27, 2010 11:01 AM | Report abuse

To some degree, Klein is offering a red herring.His apparent intent is to distract from the massive increase in federal spending under the last two years of One Party Democratic Rule, which was a primary contributor to the contemporaneous exploding deficit. Ezra does not speak specifically to the spending question, because he knows that the historic correlation of federal spending increases in the modern era when comparing divided and one party government is unambiguous and unassailable.

Divided government restrains the growth of spending. Full Stop.

This has been documented beyond any reasonable doubt by economists and political scientists like Niskanen, Van Doren, and Slivinski. Klein does not really challenge this historical fact, instead he contends that extending the Bush tax cuts are more likely under a divided government, and no spending cuts can overcome that negative impact to revenue.

This is nonsense. For one thing, the consensus in Congress to extend most of the cuts is as bipartisan as it gets. Even the administration supports extending most of the Bush cuts. After this election, it'll be practically unanimous. Moreover, the fiscal insanity of One Party Democratic Rule under the Obama administration has set the bar of improved fiscal responsibility very low. It will not be hard to improve on the record of the last two years.

I'll take your handicap and wager Ezra. Should the GOP retake a majority in either house, the deficit will decrease in the next two years compared to the last.

Dividist.Net

Posted by: DWSUWF | October 29, 2010 1:56 AM | Report abuse

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