After last summer’s showdown over raising the debt ceiling, Obama was roundly criticized for agreeing to a deficit-reduction deal that was all spending cuts and no tax hikes. Democrats, disconsolate over this seeming capitulation to House Republicans, saw it as the low-water mark of his presidency.

Yet the deal also created the bipartisan supercommittee, which was charged with finding at least $1.2 trillion (over 10 years) in additional cuts by Nov. 23. The supercommittee has a strong incentive to succeed, since its failure will trigger an automatic, equivalent cut in domestic and defense spending.

Now, as the supercommittee spars over dueling Democratic and Republican plans for meeting the target, Republicans are on the hot seat.

Democrats this week reportedly proposed a $3 trillion package over the next decade, including $1.2 trillion in revenue increases. Republicans came back with a smaller counteroffer of $2.2 trillion. The reason, of course, is that the GOP’s anti-tax fanaticism prevents it from matching the Democrats’ debt-reduction plan without proposing truly punishing cuts in federal spending.

The Republicans claim their package includes revenues ($640 billion worth) but much of it seems to come not from actual changes in the tax code, but from increased fees and co-pays in Medicare. The rest is supply side fairy dust—around $200 billion from the higher growth supposed to be generated by future tax reform.

The upshot is that Democrats now look like they are more serious about getting the nation’s debt under control, and in a way that spreads the pain of fiscal retrenchment more equitably. Republicans look like their top priority isn’t restoring fiscal discipline, but shielding the wealthy from higher taxes.

If they refuse to deal on taxes, they’ll likely be blamed for the supercommittee’s failure and subsequent trigger of automatic spending cuts. The GOP may not care about slashing domestic spending—even though it includes critical public investments in science and technology, infrastructure and education—but they do care about defense spending, which would take a whopping, half-trillion-dollar hit.

Of course, Republicans could offer a minimum bid of $1.2 trillion in spending cuts to avoid across-the-board cuts, and call it a day. Supercommittee Democrats, however, shouldn’t let them off the hook without substantial concessions on taxes. Democrats don’t want to trigger big domestic and defense spending cuts either, but it’s better to force the issue of GOP intransigence on taxes now than during the debt ceiling debate, when America stood on the brink of default.

Even if the supercommittee does its job and approves a bipartisan debt reduction plan by Thanksgiving, it’s by no means clear that Congress will pass it. Members of Congress hate nothing more than being “shut out of the process,” and many bridle at the idea of delegating power to 12 supercommittee members to craft a massive plan and present it for an up or down vote.

Complaining that he has “no stake” in the outcome, Democratic Rep. Henry Waxman added, “I find it an outrageous process, that 12 people could rewrite the laws of the United States and come up with ideas just setting there and getting into some mood that might influence them at the moment.”

Over on the right, there’s little love for the supercommmittee. Nothing is more predictable than that Tea Party zealots will rise in righteous condemnation of any plan that includes higher tax revenues, thus breaking the party of Lincoln’s solemn covenant with anti-tax gadfly Grover Norquist.

More favorable are congressional moderates, whose main concern is that the supercommittee won’t go far enough. Nearly 100 Members from both parties signed a letter urging the supercommittee to cut $4 trillion over the next decade, the amount most budget experts believe is necessary to stabilize the debt. For pain-averse lawmakers, the logic of “going big” and not having to keep repeating these excruciating political battles over spending and taxes is pretty compelling.

If the supercommittee fails, the economic and political consequences won’t be pretty. Fresh evidence that the nation’s political leaders are incapable of coming to grips with the debt crisis will no doubt cause the markets to nosedive, and could even lead ratings agencies like Standard & Poor to downgrade the nation’s credit again. This could cast a pall over the economy, just as it’s finally showing some signs of life.

Worst of all, it would deepen the public’s already explosive anger at Washington. A mere nine percent of the voters approve of the job Congress is doing, and 89 percent say they don’t trust the government to do the right thing. By going big on debt reduction, Congress could start earning back that trust.

Photo credit: DonkeyHotey

The odds of that happening rose sharply this weekend, as House Speaker John Boehner broke off talks with President Obama because he couldn’t get Republicans to support a fiscal “grand bargain” that would include higher tax revenues. That puts Majority Leader Eric Cantor in charge of GOP negotiating strategy — and on the spot.

Unlike Boehner, who seems to have the quaint idea that voters sent him to Washington to solve problems, Cantor is a faithful medium for channeling the Tea Party’s anti-Washington wrath. Rather than prepare his troops for the compromises and shared sacrifices that reducing America’s debts inevitably will entail, he’s been a zealous enforcer of the GOP’s “zero tolerance” dogma on taxes.

Cantor says Republicans can live with closing tax loopholes, as long as every penny saved goes into lowering tax rates. Meanwhile, most House Republicans last week opposed even modest efforts to trim defense spending. So here in essence is Cantor’s generous offer to President Obama and the Democrats: You agree to cut domestic programs by about $2 trillion now and we’ll vote to raise the debt ceiling by that amount. Oh, and after that, we’ll start whacking entitlement programs.

What a deal! Since no self-respecting Democrat would ever bargain on such one-sided terms, it’s hard to avoid the conclusion that House Republicans actually want to plunge the nation into a new economic crisis. Do they really hate taxes – or Obama – that much? Or maybe in their revolutionary fervor the Tea Party patriots have unwittingly internalized the old Bolshevic slogan: “the worse, the better.”

In any case, the public seems to be in no mood for a politically manufactured crisis on top of the steady drumbeat of bad economic news — and Obama has deftly set up Republicans to take the political fall.

In contrast to the GOP’s truculence on taxes, the president has appeared reasonable, flexible and persistent in trying to get Republicans to “yes.” To the chagrin of many Democrats, he’s offered to cut $3 in federal spending for every $1 in new revenue. Obama is receptive to the idea of lowering tax rates, as long as some revenue is left over for cutting deficits, and last week even gave liberals chilblains by offering to put entitlement reform on the table.

In slapping away the President’s outstretched hand, the GOP seems to be in the grip of not one but two mass delusions.

The first is that Americans are groaning under crushing tax burdens that would make Pharaoh blush. But the federal tax take has sunk to just 15 percent of GDP, far below its usual average of 19 percent.

The second delusion is that failing to raise the debt ceiling might have no repercussions. On Fox News Sunday, Sen. Jim DeMint accused Treasury Secretary Tim Geithner of trying to scare Republicans into making a bad deal. “Secretary Geithner has been irresponsible. He’s playing Chicken Little here. The fact is that we will pay our debts if it’s the last dollar we have… We’re not going to default.”

DeMint’s logic apparently is this: Since tax revenues are sufficient to cover about 55-60 percent of what Washington spends, there will be plenty of money to pay our foreign creditors. There just won’t be nearly enough to finance federal programs but, who’ll miss them? One possible answer: Social Security recipients, whose checks are supposed to be mailed Aug. 3. Others include military personnel, federal employees, and all those families hoping to visit National Parks during their summer vacation.

When the public backlash comes, Republicans won’t be able to say they weren’t warned. Geithner broke it down clearly this weekend on NBC’s Meet the Press:

“Remember…we have to borrow now 40 cents for every dollar we spend…And every week starting the week of August 2, we have to go out and finance roughly $100 billion in maturing obligations of the government. We make 80 million checks a month to Americans, 55 million people on Social Security benefits, millions more Americans on veterans’ benefits, Medicare, Medicaid, people who supply our troops in combat. Eighty million checks a month.”

The imponderable here is the markets’ reaction to a failure to lift the debt ceiling. There’s a serious risk of higher interest rates, plunging confidence in the dollar and an even deeper freeze on job-creating investments in the U.S. economy.

Eric Cantor imagines the public is behind him on taxes. More likely, he’s saddling up to lead a fiscal reprisal of Picketts’ Charge.

Photo Credit: Republican Conference

Sen. Tom Coburn (R-Okla.) has been trying to secure Republican support for revenue measures (but not tax rate increases) as part of a deficit deal. In a ploy that was almost certainly a direct challenge to Norquist’s authority in the GOP, Sen. Coburn organized a vote to end ethanol subsidies. With some Democratic support, Coburn prevailed in the Senate.  But now House Republicans are dragging their feet on any parallel action on ethanol or other corporate tax subsidies, and Norquist is predicting that Coburn is leading the GOP down the road to out-and-out tax increases.

There’s no question that any Grand Bargain on the deficit will involve provisions opposed by Norquist, whether or not they go beyond “tax reform” proposals that offset revenue measures at least in part by rate cuts.  What’s unclear is whether violations of Grover’s pledge will form the basis for primary challenges to violators in the future.  The last high-profile backslider on the ATR pledge was George H.W. Bush, who in turn had won the 1988 presidential nomination in no small part because Bob Dole refused to sign it.

A different pledge has also made a splash in Republican politics during the last week: a four-plank oath administered to presidential candidates by the hard-core anti-abortion group, the Susan B. Anthony List.  Candidates pledge:

FIRST, to nominate to the U.S. federal bench judges who are committed to restraint and applying the original meaning of the Constitution, not legislating from the bench;

SECOND, to select only pro-life appointees for relevant Cabinet and Executive Branch positions, in particular the head of National Institutes of Health, the Department of Justice, and the Department of Health & Human Services;

THIRD, to advance pro-life legislation to permanently end all taxpayer funding of abortion in all domestic and international spending programs, and defund Planned Parenthood and all other contractors and recipients of federal funds with affiliates that perform or fund abortions;

FOURTH, advance and sign into law a Pain-Capable Unborn Child Protection Act to protect unborn children who are capable of feeling pain from abortion.

The third and fourth planks reflect the current national anti-choice strategy – the fourth promotes a federal version of the laws recently enacted in several states banning abortions after 20 weeks on “fetal pain” grounds.

Five GOP presidential candidates—Michele Bachmann, Newt Gingrich, Ron Paul, Tim Pawlenty and Rick Santorum—immediately signed the SBA pledge.  Four—Mitt Romney, Herman Cain, Jon Huntsman and Gary Johnson—pointedly did not.  Romney refused to sign on grounds that the planks on funding cutoffs and appointments are too broad.  Cain rather strangely argued that no president should be pledged to interfere with congressional prerogatives by “advancing” legislation, while Huntsman seems to object to the whole idea of pledges.  Bachmann and Santorum quickly attacked Romney’s failure to sign the pledge as another sign of his lack of commitment to the anti-choice cause, and Santorum has also gone after Huntsman.

Keep in mind that with the exception of minor candidate Gary Johnson, all of the Republican presidential candidates embrace a categorical anti-choice position that favors a total ban on abortions regardless of the stage of pregnancy and removal of the constitutionally-established limit on abortion restrictions involving the health of the pregnant woman.  The SBA pledge is interesting in that it requires support for specific strategies to reach the agreed-upon goal of a return to the days when virtually all abortions were illegal, along with restrictions on contraceptive measures that right-to-lifers now consider equivalent to abortion.

Because these distinctions aren’t that well-known outside the ranks of anti-choice activism, it’s unclear what if any impact the SBA Pledge controversy will have on actual voters.  But it could matter in those early states, such as Iowa and South Carolina, where social conservatives are especially strong.  And the flap will certainly become another talking point in the effort to convince conservatives that Mitt Romney cannot be trusted.

Photo Credit: Gage Skidmore

This snapshot of the mood at New Hampshire Tea Party events by Michael Crowley is illustrative:

The overall picture is one of a restless Republican base that sees defeating Obama as a matter of national survival. Angry conservatives believe Washington is spending the country into oblivion, and that lazy freeloaders are leeching federal money at the expense of ever more squeezed middle-class taxpayers. They also feel that the Washington game is rigged against them: “We’re constantly being lied to,” fumed Dan Dwyer of Nashua at a local GOP confab on Thursday night, still angry that Republicans had “caved” in their budget negotiations with Democrats earlier this month.

At a Wisconsin Tea Party rally, anger at congressional Republicans was fed by none other than Sarah Palin, who “unleashed a withering critique of congressional Republicans Saturday, lambasting them for not cutting spending deeper and faster, and saying the party needs to ‘fight like a girl.’”  Meanwhile, Tim Pawlenty, who spoke at a number of Tea Party events, has been urging Republicans to oppose a debt limit increase on the questionable grounds that arrangements could be made to avoid a federal credit default until the autumn.

The superficially confusing aspect of this rhetoric is that the conservatives who are being most vocal about the dire nature of the deficit-and-debt emergency are precisely the same people who are fearful that congressional Republicans might cut some long-term budget deal with Senate Democrats and the administration that leaves increased taxes on the wealthy on the table.  That’s why they are linking any approval of a debt limit increase not just to some deficit agreement, but to acceptance of the kind of deep spending cuts and “entitlement reforms” laid out in Paul Ryan’s budget proposal.

Accordingly, we will soon see Tea Party fire concentrate on those Senate Republicans said to be negotiating a deal that would include some tax increases.  The Republican point man in the so-called “Gang of Six” of bipartisan senators engaged in these negotiations, Saxby Chambliss of GA, is already drawing unfriendly home-state fire from Red State’s Erick Erickson, who had this to say today:

Senate Republicans are going to support raising the debt ceiling and raising taxes all while refusing to demand passage of a Balanced Budget Amendment. House Republican Leaders will no doubt decide that . . . well . . . Republicans only control one house of one branch of government so . . . .

Bend over America.

This conflict will soon make it more obvious than ever that most conservative activists, including those identified with the Tea Party Movement, are less concerned with deficit reduction than with permanently shrinking the size and reach of the federal government and pushing both radical spending cuts and continued tax cuts.

On another front, there are growing signs that Republican elites have decided to give Donald Trump the same dismissive treatment that was said to have led to Sarah Palin’s steady decline in credibility as a potential presidential candidate.  Over the weekend, Karl Rove called Trump a “joke candidate.” Playing his snooty Tory role, George Will called The Donald a “blatherskite,” and warned he could seriously screw up Republican presidential candidate debates.  Slate’s Dave Weigel went to the trouble of reading Trump’s 2000 proto-campaign book, and noticed that Trump expressed a fondness for the Canadian single-payer health care system.  Surfing off that disclosure, the Club for Growth put out a release calling Trump a “liberal.”

It’s almost certain that this offensive was stimulated by the Public Policy Polling survey of Republicans that was released on Friday showing Trump jumping out into a sizable national lead over the rest of the potential presidential field.  Trump’s 26 percent is higher than any proto-candidate has registered in early national polls.  And the internals, showing 23 percent of Republicans saying that could not vote for a candidate who believes Barack Obama was born in the United States (and another 39 percent saying they weren’t sure if they could or not), were probably terrifying to beltway GOPers.

Yesterday, the Progressive Policy Institute joined forces with the Moment of Truth Project to host an event to discuss what comprehensive tax reform should look like, and what it will take to get it passed. (Moment of Truth was formed by Fiscal Commission co-chairs Erskine Bowles and Sen. Alan Simpson to build momentum behind the commission’s deficit reduction plan.)

Yesterday’s event, at Johns Hopkins University, helped build the momentum for reform. There was wide consensus that tax reform will need to be bipartisan and comprehensive, and will need to scale back most of the $1.1 trillion in tax expenditures. Tax expenditures are at the heart of the “modified zero plan,” which would eliminate or scale them back, and use the savings to cut individual and corporate tax rates, as well as budget deficits.

Coinciding with the event, PPI released a policy memo on the modified zero plan, written by PPI Senior Fellow Paul Weinstein  and Marc Goldwein of the Committee for a Responsible Budget, and both formerly of the Commission. Both were on hand.

Yesterday’s forum event featured three Senators who have been leading the charge for reform – Michael Bennet (D-Colo.), Ron Wyden (D-Ore.) and Dan Coats (R-Ind.) – and one CEO and Fiscal Commission member, Dave Cote (CEO of Honeywell). They provided the big picture framing, so I’ll summarize the highlights of their remarks first, and then delve into the two panels of experts second.

Sen. Bennet kicked off the event with stories from the town halls he’d been spending the last two years doing: “In every single meeting, debt and deficit came up,” he said. “There’s a deep skepticism that if we can’t figure out how to pay our bills, it suggests a lack of confidence in our government and our elected leaders, and it’s fairly well-placed.”

Bennet offered three criteria for what a deficit reduction plan would have to accomplish to pass muster with voters. First, it would need to be comprehensive. “People know we can’t fix this overnight, but they want it to be comprehensive.”; Second, sacrifice has to be shared: “They want to know that we’re in this together, and everybody has a share of the burden.”; Third, it has to be bipartisan.

Coats laid out a similar series of principles for the legislation that he has introduced with Senator Wyden. First, he said, echoing Bennet, it has to be bipartisan. Second, it has to be revenue neutral. Third it has to be simple (“Right now we’ve got 71,000 plus pages of tax code, 10,000 plus special preferences and deductions. It’s a nightmare.) Fourth, it has to help out the middle class, and help families to save money for college, and help charitable organizations. And fifth and finally, “this has to be based on a principle of growth…the bottom line is it has to lead to jobs.”

Wyden looked at the problem through the lens of tax simplification, noting that as April 15 approaches, “Americans are going through the 6 billion hours they spend each year filling out tax forms — 690,000 years is what you have in an annual effort going through the water torture of figuring out if line 9 is modifying line 7.”

Wyden also stressed that any tax reform also needed to encourage investment in what he called “red-white-and-blue jobs” – that is, solid American jobs, preferably in manufacturing.  Wyden called his bill fundamentally a jobs bill.

Cote, CEO of Honeywell, echoed similar themes in his remarks. “We need a global competitiveness agenda for the U.S.” he began. “Our corporate tax system is globally uncompetitive. We have the highest tax rate in the world, and we’re the only major country with a territorial system that encourages companies to keep their cash overseas. And we give back $1.2 trillion in what is euphemistically named ‘tax expenditures,’ but just another form of spending that’s done through the tax code.”

Echoing the urgency of the Senators, Cote posed the looming crisis this way: “The debt problem can get resolved one of two ways. We can do it now and do it thoughtfully, or the bond market can force us t do it, like Greece and Portugal.”

Moving to the policy substance, the first panel featured Paul Weinstein, PPI Senior Fellow, Diane Rogers of the Concord Coalition, Alan Viard of the American Enterprise Institute, and Howard Gleckman of the Tax Policy Center as moderator

Weinstein gave the quick version and backstory of the “modified zero plan,” which is the subject of a new PPI memo Weinstein co-authored. As the name might suggest, it began as the “zero plan,” which was the name the deficit commission gave the plan that reduced all tax expenditures to zero, saving $1.1 trillion in deductions, credits, and deferrals. The “modified zero plan” put back in only a few consensus tax expenditures, like the EITC, a mortgage deduction, a charitable contribution deduction.

“The rates are lower, it simplifies the tax code to fewer incentives and helps reduce tax avoidance and mistakes,” explained Weinstein. “Obviously the revenue increases get bigger and bigger over time. We estimate $800 billion over ten years.”

Rogers responded favorably to the plan. “I like the approach. There’s something for everyone to love,” she said. “Liberals should like it because it’s progressive and better than having to cut direct spending. Conservatives should like it because it’s an economically efficient way to raise revenues, and it doesn’t raise the size of government. It reduces the size of government.”

Viard gave it two cheers. He called it “Well-specified and thoughtful. This is one of the best approaches you can have with an income-based tax system that includes a separate corporate income tax.” Viard’s stated preference was for a value-added tax (VAT), though the subsequent discussion highlighted how difficult the politics of transitioning to a VAT would be. (Rogers put it this way: “we should work within the existing system first.”)

As the discussion shifted into the politics of policy, there was general agreement that tax reform terminology is confusing to the general public, and any discussion of tax expenditures is going to lead to thousands of interest groups begging to keep their favorites. And again, there was agreement that it needs to be comprehensive. “Tax reform can’t be done unless it’s in the context of deficit reduction,” said Weinstein. “You need to look at the whole apple.”

The second panel featured Leonard Burman of Syracuse University, Marc Goldwein, of the Committee for a Responsible Federal Budget, Joseph Minarik of the Committee for Economic Development and Derek Thompson of The Atlantic as moderator.

Goldwein began by reiterating the consensus: “The current income tax code is a mess. There is a consensus to broaden the base, and reduce the rates, and don’t keep tax expenditures that aren’t worth their cost.”

But how to do that? Burman argued that ending tax expenditures would require not referring to them anymore as tax expenditures. “We need to change the fiscal language. I sometimes call them IRS pork,” he said. “Part of the problem is mischaracterizing tax expenditures. Some people think that by putting new tax expenditures in the code you’re making government smaller, but what you’re doing is just spending more money and making taxes higher to achieve a given level of revenue.”

Minarik, a grizzled veteran of tax fights, highlighted the fact that the inside-the-halls negotiating in Congress is very different from the “outside” formulating that goes on at events like this, and reminded everyone that the simpler the solution, the easier it will be to pass. In that respect, he said, a fifth-best solution that’s simple and straightforward is better than a second-best solution that can lead to more complicated politics.

Not surprisingly, scattered calls for a fresh look at the ready availability of the kind of weapons and ammunition deployed in Tucson haven’t gotten much traction. Rep. Carolyn McCarthy (D-NY) has reintroduced her bill to ban certain high capacity ammunition magazines, which is a way to reduce the lethal effect of firearms without banning the weapons themselves. But it’s not likely to see the light of day in the Republican-controlled House. A more likely avenue of response to the shootings is via interest in care (voluntary or involuntary) for the violence-prone mentally ill. Still, the very eve of perhaps the most intensive effort ever to reduce discretionary social spending isn’t the best possible time to call for a boost in mental health services.

With or without any formal sanction, beefed-up security for Members of Congress and other elected officials is almost certain to emerge, along with significantly greater caution about public events and casual contact between elected officials and constituents. (Typically, conservative blogger Ben Domenech suggested arming congressional staff). Again, the timing isn’t great, given existing levels of public unhappiness with government and politicians, much of it motivated by the sense that officeholders have “lost touch” with the citizenry.

The hiatus on activity in Washington has not extended to state and local governments (other than in Arizona), where a difficult new year is unfolding under the shadow of one of the worst fiscal crises since the Great Depression. A new analysis from the Center on Budget and Policy Priorities shows that in December alone, state and local governments laid off 20,000 employees. Overall, state and local payrolls have dropped by 397,000 since August 2008, with just over half the reductions attributable to local school districts, even though national public school enrollment levels have risen by 741,000 since the beginning of the recession. with revenues still bottoming out and stimulus funds scheduled to run out soon, state and local employment is likely to drop even further in 2011. This even without taking into account many new Republican officeholders determination to public employees for cutbacks while cutting taxes for corporations and high-income individuals.

Just last week there was a development within the conservative movement that may pour cold water on Republican “tax reform” efforts at the state level, which were aimed at paying for income tax cuts with increases in sales taxes. Conservative policy commissar Grover Norquist of Americans for Tax Reform condemned a Republican-sponsored proposal in Georgia to boost net revenues through a broadening of the sales tax base accompanied by income tax cuts. Any “reform” plan, said Norquist, would violate the no-tax-increase pledge his group has secured from a vast number of GOP pols unless it reduces the overall tax burden, not just the portion borne by corporations or the wealthy. This ukase has obvious implications for similar talk of a more-revenues-through-base-broadening-and-lower-rates deal in Washington. And aside from the impact on tax progressivity, an abandonment by conservatives of schemes to raise more revenues via more regressive taxes will increase the pressure on public spending, as Norquist made plain by calling for major reductions in the “size and scope of government.”

Last night’s House approval of the Obama-McConnell tax deal is a case in point.  The White House survived its most emotional collision yet with the left wing of the Democratic Party, and managed to secure a majority (139-112) of House Democratic votes for the deal, despite an earlier Democratic Caucus resolution disapproving it.  It’s probably worth remembering that in his own disputes with House Democrats, Bill Clinton wasn’t always so successful: majorities of House Democrats voted against NAFTA in 1993 and welfare reform in 1996.

If you look through the roll call on the tax deal, the Democratic votes are generally not surprising: most “nays” came from the more liberal Members, including, interestingly enough, all members of the leadership other than Steny Hoyer and Nancy Pelosi (who didn’t vote).  There was, however, a smattering of deficit hawks among the naysayers.  The vast majority of true “lame ducks” (defeated or retiring Members) voted for the deal.

Approval of the deal will obviously create another big tax debate during the 2012 presidential campaign.  But more immediately, it will be interesting to see to what extent the deal and the debate over it has set back efforts to build bipartisan support for deficit reduction measures.  Without question, congressional Republicans will now be under more pressure than ever to cut “liberal” spending programs, but the very limited Democratic support for such steps probably got a lot weaker during the tax deal debate.

That brings me to the other big development yesterday: the defeat-by-threatened-filibuster in the Senate of an omnibus appropriations bill for the current fiscal year.  This outcome resulted from no fewer than nine Republican senators reversing earlier support for the bill, and was very heavily influenced by publicity over earmarks—many inserted by Republican senators—which is now officially a no-no for Republicans.

Tea Party types were actually upset not just by the earmarks, but by overall levels of spending.  And Republicans may have bought themselves some early trouble: after a short-term continuing resolution, they will bear new responsibility for drafting a House version of either individual or omnibus appropriations bills, and will finally have to admit that items more popular than waste, fraud and abuse would have to be cut to produce sizable savings.

On the other hand, as David Dayen has pointed out, by losing the omnibus appropriations fight, Democrats could have set the table for undoing the stimulative effect of the tax deal.  If Republicans succeed in securing major appropriations cuts—say, an across-the-board reduction attached to a continuing resolution—then that could indeed reduce aggregate demand, particularly in conjunction with the wide-scale spending reductions that will soon be initiated by state governments who can no longer count on the safety net dollars of the 2009 stimulus legislation.

Other bills kicking around the Senate at the end of this session also carry a lot of political freight: the DREAM Act, which was once an acceptable Republican vehicle for offering a hand in fellowship to Latinos, yet is now an opportunity for casting an angry anti-immigrant vote; the DADT repeal, which is inevitable, but is also still a source of great angst in Christian Right circles; and the START Treaty, which could determine whether anything like a bipartisan foreign policy can be carried out in today’s polarized atmosphere.

We’ll know a lot more after a frenetic weekend that could feature a DADT vote on Sunday.

How ugly is this deal? Let us count the ways. First, it forces progressives to swallow the Bush tax breaks for the wealthiest Americans. President Obama’s undoubtedly painful decision to go back (for now) on his oft-repeated promise to repeal them reflects the post-midterm political realities of divided government.

Second, it’s hugely expensive. It could cost as much as $800 billion over the next two years, even as the federal government staggers under the weight of massive deficits. It’s an inauspicious start, to say the least, to the new era of fiscal discipline Republicans promised in the midterm elections. Let’s face it: they’d rather have tax cuts. In any case, the price tag makes you wonder if America can afford this kind of bipartisan compromise.

For all that, the deal was probably inevitable given the economy’s persistent weakness. To have failed to extend the middle class tax cuts would have withdrawn hundreds of billions of purchasing power from the economy at a time when demand is insufficient to trigger new business investment. To have not extended the cuts for upper-income taxpayers would have made it difficult if not impossible for Obama to get what he wanted from Republicans: namely, an extension of unemployment benefits, a payroll tax holiday workers next year, and a renewal of business tax breaks passed this year.

Waiving the payroll tax is an important creative addition, since by lowering labor costs it gives employers a direct incentive to hire workers. Also on the plus side, the deal keeps rates on capital gains and dividends low, and includes “direct expensing” of business investments.

President Obama clearly views his tax provisions as stimulus by the only political means available to him, given public – not just Republican antipathy – to more government spending. He raised the stakes yesterday, warning that America has arrived at another “Sputnik moment” and could be eclipsed by rivals if we can’t turn the economy around. The President also showed little patience with liberal purists who are loudly bewailing, for the umpteenth time, their “betrayal” by a Democratic President.

“Sympathetic as I am to those who prefer a fight over compromise, as much as the political wisdom may dictate fighting over solving problems, it would be the wrong thing to do,” he said. “The American people didn’t send us here to wage symbolic battles or win symbolic victories.”

It’s true that a majority of the public consistently has opposed tax breaks for the rich. But it’s also true that Americans, and especially the independents who propelled the Republicans’ midterm gains, have even less appetite for political brinkmanship designed to score partisan points. The U.S. left is always up for a bracing round of class warfare, but voters aren’t likely to reward tactics that could result in slowing down the recovery and raising their taxes at the worst possible moment.

The good news is that the extension is only for two years. That gives time for a reconsideration of the whole ungainly package in 2012, by which time the jobless rate presumably will have fallen back to earth. That allows room for a more constructive debate next year over a sweeping tax overhaul designed to promote growth, long-term fiscal stability, and fairness. It also puts the question of how to restore a progressive tax code smack in the middle of the next presidential elections, where it belongs.

Photo credit: David Reber

That’s assuming it’s approved by Congress.  Bernie Sanders is already promising a Senate filibuster on the deal, whose very existence is offensive to many progressives, and RedState’s Erick Erickson is calling for opposition from conservatives.  But it will probably get through these obstacles, if only because about the only political force that actually supports the alternative—the expiration of all the Bush tax cuts along with a major lapse in unemployment insurance benefits—is the deficit-hawk Democrat contingent, who have limited clout in Congress at the moment.

The revolt against this deal on the left will likely generate more heat and noise than actual votes. Many progressives are already furious at Obama for telegraphing his willingness to cut a deal before it was necessary, and for his generally uncombative pubic stance, which they interpret as evidence the President didn’t learn much from his first two years in office.  Others simply want to register as strongly as is possible their rejection of the ideology supporting the Bush tax cuts, including the estate tax reductions that are incorporated into the compromise.

As scrutiny of the deal sharpens, however, the extension of increases in refundable tax credits aimed at the working poor in last year’s stimulus package may get some attention as well.  These are benefits that Republicans have been increasingly denouncing as “welfare,” so this is perhaps a victory-in-principle for progressives.

Ultimately, the political impact of the deal will probably be measured by its impact, if any, on the economy.  Will the payroll tax holiday provide some critically timed stimulus?  Will investors be impressed by the bipartisanship of it all?  And would the alternative of letting the tax cuts expire and work in Washington grind to a halt have guaranteed the much-feared “double-dip recession”?

Matt Yglesias stresses these short-term economic consequences in his own reaction to the deal:

[T]his has partially set my mind at ease about the prospects of a GOP strategy of economic sabotage. The tax policy the right wants, though in general bad for the country, is not bad for short-term economic performance. And the concessions they were willing to give Obama in exchange for boosting the incomes of rich people are expansionary in the short-term. So the terrain here exists well within the range of “normal” politics where conservatives want lower taxes on rich people. This is kind of nutty in my view, but it’s a deeply held article of faith on the right and not some ad hoc effort to sink the economy or anything.

Ezra Klein,  however, notes the limited stimulative effect the deal is likely to have:

Most of the money just keeps programs that are currently in effect from expiring, so in some ways, it would be more accurate to say that this money is anti-contractionary rather than stimulative. It’s important that the White House doesn’t repeat the mistake it made in the original stimulus and overpromise how much this will do for the economy. What you can say about this policy is that, for the moment, it doesn’t make things much worse, and it probably makes them a bit better. This is not the government making a major new commitment to the recovery. It’s the government not getting in the way, and maybe doing a bit to help, the horribly slow recovery that’s happening anyway.

A collateral benefit, of course, would be the enactment during the lame-duck session of the Defense Authorization bill, which includes an end to DADT, and Senate ratification of the START treaty.  The deal seems to have eliminated the most immediate obstacle to action on these measures; we’ll soon know if progress is now possible.

More generally, the deal guarantees another and perhaps truly definitive battle over tax principles in 2012, adding to the high-stakes nature of that year’s presidential election.

Photo credit: id3

Since the Great Depression, the tools of choice for fighting economic downturns have been countercyclical monetary policy and countercyclical fiscal policy. That is, when the economy slowed, economists would recommend cutting interest rates, reducing taxes, and boosting government spending to pump up demand. And for 75 years, those policy measures were enough.

But in the aftermath of the financial crisis, we seem to have almost exhausted the limits of monetary and fiscal policy to create jobs. The Federal Reserve has pushed interest rates down to near zero, although it appears ready to try another round of quantitative easing.

Meanwhile, the federal budget deficit hit $1.3 trillion in fiscal year 2010. In the aftermath of the midterm election victories of candidates who ran against federal spending, it seems politically unlikely that there will be another round of  fiscal stimulus.

Under the circumstances, it may be time to try something new: Countercyclical regulatory policy. That means following a very simple rule: Don’t add new regulations on innovative and growing sectors during economic downturns.

The goal: To encourage innovation and job creation by temporarily abstaining from additional regulation on innovative sectors, and perhaps even temporarily abating some existing regulations on innovative sectors (what I call innovation ecosystems).

The key word here, of course, is ‘temporarily.’ Like countercyclical monetary and fiscal policy, countercyclical regulatory policy is designed to provide a short-run stimulus to the economy by making decisions that can be reversed when the economy improves—the equivalent of a temporary investment tax credit. In other words, countercyclical regulatory policy is not the same as deregulation. It presupposes that regulators stay alert and take care of abuses.

Read the entire memo