With low interest rates and divided government, it’s time for an ice cream party.
A bipartisan deal is President-elect Joe Biden’s only hope to get the kind of enormous Covid-19 relief bill and the dream of an “FDR-size presidency” that he wants. But bipartisanship doesn’t mean Democrats should return to the deficit-slashing, grand-bargaining approach that failed under President Barack Obama. There’s a better option.
The election results are on course to set up a divided government, with a Democratic president, a thin Democratic majority in the House, and a thin Republican majority in the Senate, or, best case for Democrats, a single-vote Senate majority.
Republicans would prefer a small relief bill if they provide any at all, with principled skepticism about government spending now aligning with a cynical lack of interest in seeing Biden preside over an economic boom.
And even if something gets done on relief, the bitter fiscal policy fights won’t end there. As one veteran of Obama-era battles tells me, it’ll be “trench warfare on appropriations and debt limit” starting with the expiration of government funding this December and continuing to August’s statutory debt ceiling.
Under the circumstances, Democrats could understandably be tempted to turn to the hoary Obama-era trope of deficit-reduction negotiating. After all, when Donald Trump became president, one of the Republican Party’s key policy objectives was to cut long-term Medicare spending. With Trump in office, that priority went away, but the desire didn’t.
Mitch McConnell simply pivoted to the theory that once Republicans were done cutting taxes, entitlement reform would have to be done on a bipartisan basis, seemingly concluding from the Trump experience that a one-party approach to these issues is less viable than he and Paul Ryan thought in the Obama era.
Biden, meanwhile, was a serious deficit hawk for most of his Senate career, and several of his current top advisers, including Bruce Reed and Jeff Zients, were deeply involved in Obama-era deficit reduction drives.
These could add up to a scenario where Republicans insist on spending cuts in government funding deals while Democrats argue that deficit reduction should feature tax increases too in order to be balanced and fair. This would exacerbate party tensions on the Democratic side, make it essentially impossible for a Biden administration to solve any big problems, and very likely founder on the basic reality that Republicans are fanatically opposed to taxing the rich.
There is an alternative to “eat your peas” politics — a push for a different kind of bipartisan deal in which, rather than giving up on progressive spending priorities, Biden tries to secure support for them by giving in to big, GOP-friendly tax cuts.
The Democratic economic policy wonks I’ve floated this by are skeptical, but mostly because they insist Republicans would never go for it. The Republicans are more optimistic — though they concede it’s dicey. Call it an ice cream party, the opposite of eating your peas. Certainly it might fail. But given the economic fundamentals, it’s worth a shot.
The country can afford ice cream for everyone
Democrats, with good reason, generally do not believe that large tax cuts for rich people are a good idea. They’ve also struggled for the past two decades to explain exactly why they’re a bad idea. But left-wing Democrats hate inequality while more moderate ones are suspicious of deficits.
Way back in a 2006 speech, for example, then-Sen. Barack Obama complained about George W. Bush’s policies that “over the past five years, our federal debt has increased by $3.5 trillion to $8.6 trillion. That is ‘trillion’ with a ‘T,’” he reminded us, saying “that is money that we have borrowed from the Social Security trust fund, borrowed from China and Japan, borrowed from American taxpayers.”
In retrospect, it’s truly remarkable how much money was spent during Bush’s first term with so little to show for it. Two rounds of tax cuts plus two wars — one with few successes and high human costs and the other a catastrophic failure — did not deliver much of a return on the $5 trillion invested.
But the deficits themselves were fine — finding people to lend the American government money was easy, and did not give China or Japan or anyone else power over us.
The interest rate investors charged on the federal debt was not especially high at the time Obama complained, and it’s only fallen since then across the financial crisis, stimulus, failed efforts at grant bargain, Trump tax cuts, pandemic, and more stimulus.
In particular, debt service payments as a share of GDP have plummeted since the 1980s and 1990s and are currently falling rather than rising.
The upshot is that the practical limit on the government’s ability to deliver fiscal stimulus is political, not economic. Nancy Pelosi and House Democrats initially proposed the $3.4 trillion HEROES Act, which was much more than Republicans were willing to spend (some Democratic economists also quietly tell me it was legitimately more than needed). They then lowered their bid to a $2.2 trillion package, while Mnuchin countered with a $1.8 trillion proposal. McConnell’s last offer was at $650 billion, and his position will probably become stingier given the election.
Realistically, even the smallest of these relief packages would help the country. And even the largest of them is affordable. But while Republicans obviously aren’t going to agree to a giant spending increase just to be nice, they might do it in exchange for a giant tax cut.
Republicans never finished their tax cut ice cream
Back in 2001 and 2003, George W. Bush wanted to enact tax cuts, and he wanted to do it using the budget reconciliation process to avoid a Democratic filibuster. But to qualify for reconciliation treatment, a law can’t raise the long-term budget deficit. So Republicans wrote a bill to cut taxes for nine years and then have them go back to Clinton-era levels in 2011.
Their thinking was that they could then campaign on extending the tax cuts later.
And so they did, but that didn’t stop Barack Obama from winning in 2008 and threatening to block their extension. Then in the lame-duck session after the 2010 midterms, Obama agreed to extend the tax cuts for two more years in exchange for Republicans doing a bit more fiscal stimulus. After Obama won again in 2012, there was another standoff, and another deal — extending most of the Bush tax cuts but raising taxes on families earning over $450,000 and again getting a bit more stimulus.
Then in 2017, Republicans pulled another version of the same move — pairing an unpopular permanent cut in corporate taxes with temporary cuts in individual income taxes, figuring they could run on extending them during the 2024 campaign.
But now Biden will be president, Democrats still control the House, incumbent presidents usually get reelected, and the odds of these cuts mostly being reversed (a few provisions, such as the increased generosity of the child tax credit, have bipartisan support) are decent. In an “ice cream for everyone” scenario, instead of offsetting his spending ideas by rolling back the Trump tax cuts, Biden could consider doing the opposite: swapping his spending ideas for the GOP’s tax ideas.
Now, make no mistake, permanently extending these tax cuts is an expensive proposition — costing over $1 trillion, according to the Tax Policy Center — and it’s very regressive, delivering much larger benefits to people in the top 20 percent of the income spectrum than to those in need.
But while this is not by any means a good idea, it’s also far from clear that it would be harmful. Current interest rates are very low, and they are likely to stay low for some time. The Federal Reserve recently adopted a new framework it calls Average Inflation Targeting (AIT), which critics, like David Reifschneider and David Wilcox of the Peterson Institute for International Finance, warned pre-Covid would be a “weak tool to deal with recession.”
Under the old framework, the Fed’s promise when inflation slipped below the 2 percent target rate was to restore it to 2 percent as quickly as possible. Under the new framework, the Fed promises to make up for past undershooting by allowing inflation to overshoot 2 percent before it raises rates. That’s a weak tool because it only very indirectly inspires anyone in the private sector to go spend more money. But what AIT does is hand a very powerful tool to Congress in the form of a guarantee that a strongly stimulated economy won’t be offset by immediate interest rate hikes.
An even more expensive idea, at least in the short term, would be permanent extension of a Tax Cuts and Jobs Act provision allowing businesses to immediately write off the full cost of their capital investments.
The short-term cost of this is very high because you’re losing a big chunk of corporate tax revenue. But the longer-term cost is considerably lower because, as Kyle Pomerleau and Scott Greenberg of the Tax Foundation point out, those investments do get written off over time under the current tax code anyway. Over an infinite time horizon, the revenue is essentially the same, though in any finite span of time you raise less with immediate expensing. The combination of high short-term costs and modest long-term ones could make something like this an ideal component of an ice cream party.
Can Democrats get over their love of targeting?
I floated the ice cream party concept past three Democratic economists who were involved in Obama-era budget negotiations on either the White House or congressional side, and they all said Republicans wouldn’t go for it (given the résumé-swapping going around the transition period, nobody wants to be quoted on the record about anything controversial).
These are not austerity fans or entitlement reform enthusiasts; they just think bargaining is much more likely to be small-ball stuff like the 2015 tax extender deal rather than a huge multitrillion-dollar package.
On the other hand, two Republicans involved in tax policy said they were intrigued personally, though they were also fairly skeptical of the politics.
One issue is simply that Democrats have traditionally been leery of this kind of thing. In 2008, Democratic experts adopted the slogan that fiscal stimulus should be “timely, targeted, and temporary” — i.e., focused on quick transfers of cash into the hands of the people most likely to spend it.
The 2009 American Recovery and Reinvestment Act was based on those principles, and the $600-a-week bonus unemployment insurance program in the CARES Act was perhaps their ultimate expression. The money started flowing fast (timely). It went to people who had urgent financial needs (targeted). And then it went away (temporary). Normally the Democratic wonks need to synthesize this view with Democratic Party elected officials’ desire to recreate their understanding of an FDR-style public works drive. But both the wonks and the hacks are united in their opposition to the conservative view that long-term investment tax cuts are a good idea.
As Samantha Jacoby and Kathleen Bryant wrote of full expensing proposals for the Center on Budget and Policy Priorities in June, “Those resources would be far better spent on more effective fiscal stimulus tools.” The implicit model is that there is some fixed sum of stimulus, and it’s important for the stimulus to be well targeted so you get the most bang for your buck.
The ice cream party way of thinking: The amount of stimulus available is limited by what congressional Republicans are willing to do, so it doesn’t matter if their ideas are bad — it only matters if they are willing to pair their ideas with your ideas.
But are they?
Can Congress do more than electioneering?
The fundamental issue is that electoral politics is zero-sum in a way that policymaking is not.
Currently, the United States is enjoying very low interest rates, which makes it extremely affordable to enact costly measures. Under the circumstances, the opportunity is clearly available for a win-win deal in which everyone gets to do something big that they are excited about. The parties don’t need to agree about what flavor of ice cream to eat; they just need to agree that everyone gets some ice cream. Reasonable people can disagree about which flavor would be helping the economy, but it’s pretty clear that one would in fact help the economy.
But that gets us to electoral politics, which is zero-sum. Only one person can win any given election. And it’s not obvious that Republicans would want to see a lot of successful policymaking happen in the Biden years.
Consider that early in Trump’s term, it was common for Democrats to worry that the White House might unveil a completely reasonable infrastructure proposal. If that happened, they’d have no choice but to agree and then Trump could become a popular and successful leader.
Instinctively, Democrats will completely reject any analogy between the threat of a popular and successful Trump (an authoritarian proto-fascist in their view) and a popular and successful Biden (a kindly old moderate in their view).
But Republicans may take a different view of things. This, however, is why putting permanent tax cuts on the table in a deal could be so potent. That would be a really big policy win for Republicans. Big enough that Democrats will find it genuinely painful, but by the same token big enough that Republicans could find it genuinely tempting.
Maybe they won’t go for it. But more likely, Democrats won’t even attempt to broach the subject — preferring to stick to targeted measures, settle for less if necessary, and potentially fall back to “eat your peas” efforts to reduce rather than increase the long-term deficit. But the best route to a successful Biden administration is the ice cream party, and if there’s one thing we know about Joe Biden, it’s that he likes ice cream.
Author: Matthew Yglesias