Krugman's Perspective on the Deal

[Tom Rinaldo]

30. It's like this

This is just the latest chapter in an ongoing deficit drama. Simplifying slightly, last year Obama accepted a trillion dollars in spending cuts and now Republicans just accepted 600 Billion in new revenues. Just about EVERYONE in elected office at the national level agrees that much more deficit reduction is needed. Most of the sequestration has only been delayed a couple of months. We are about to hit up against the debt ceiling again - so this is just a short holiday pause in negotiations, not the final deal. Obama clearly is on record advocating for a much larger deficit reduction deal moving forward. How will that be achieved?

The next round will include major budget cuts - that is certain. If there were any relatively painless budget cuts outside of the Pentagon they were already part of the Trillion dollar cuts Obama accepted last year. It only gets more difficult from here. Meanwhile the easiest and least painful for almost all Americans to bear source for new Government revenues has also now been tapped – the Bush Tax Cuts. That was the only revenue pot available for Obama could harvest from by simply waiting out Republican intransigence.- they expired automatically. Now they are renewed permanently at the $450,000 and $400,000 a year income levels. We know that typical Americans would not have been touched by letting those taxes expire above the $250,000 level. We can not be certain that typical Americans will not be touched by any remaining source of increased revenues remaining to be tapped.

Take limiting tax deductions for example, that could include charity deductions – and many Americans depend on services provided by charities. The home ownership deduction is something that many middle class families depend on to lower their overall tax burden – and that might be part of some future deal also.

Meanwhile budget cuts will move front and center in the next round of negotiations, and Republicans will enter into them claiming that they already showed a willingness to compromise because they just agreed to 600 Billion in new taxes (that they were powerless to stop from happening at an even greater level if not deal was struck) without getting much of anything in new spending cuts. Obama did not get the resolution of the debt ceiling agreement that he wanted badly in return for bending on the Bush tax cuts. So we are headed toward a new round of confrontations without the leverage that the built in expiration date on the Bush tax cuts gave us last time.

Furthermore Obama had a clear public mandate to hold the line on extending tax cuts to the $250,000 level. He was able to argue that he won the election on that campaign pledge. For better or worse, depending on your viewpoint I suppose, Obama has now cashed in that clear mandate – that political capital has now been spent He will not be able to emphatically say that the public has already clearly spoken when the next round of budget impasses hit