John Harwood: Why Both Parties Want an Economic Fight

John Harwood writes in The New York Times:

Senators return to the Capitol this week for more close-quarters combat over the economy, before heading home on summer recess to continue the battle long-distance.

But the economic fight is only partly about the economy.

It’s also about dogma — dogma that sometimes keeps both parties from the goals they claim to be fighting for.

The Obama White House and Democratic Congressional leaders say their top priority is accelerating the recovery from the Great Recession. New government data last week confirmed earlier signs of slowing momentum, with a 2.4 percent second-quarter growth rate that isn’t nearly enough to make a major dent in the 9.5 percent jobless rate soon.

Yet leading Democrats rule out a short-term, across-the-board extension of the expiring Bush tax cuts, even though a temporary extension might stimulate the economy.

Congressional Republicans say their top priority is stopping the explosion of debt and deficits that threaten to sink the economy over the long term. A new analysis by the Congressional Budget Office last week reported that without spending reductions, higher taxes or both, “growing budget deficits will cause debt to rise to unsupportable levels.”

Yet Republicans insist that the Bush tax cuts be made permanent, even though eliminating them could substantially reduce deficits over the long term.

The two rival political armies are wheeling into place for a set-piece battle in the fall, in advance of midterm elections.

It’s unclear which side will gain ground, how and when the combat will end, and whether an eventual cease-fire might blend their competing arguments through lower taxes now and higher taxes later.

For the moment, the only certainty is that both sides want to fight.

An Article of Faith

In extending unemployment benefits over Republican opposition last month, Democrats offered two principal arguments.

One was that extending benefits provided needed assistance for workers facing a bleak job market. The other was that the $33.8 billion in deficit spending would stimulate the economy.

As it happens, according to the budget Mr. Obama released in February, $33.5 billion would be added to the deficit in 2011 if the Bush tax cuts were extended another year for households earning at least $200,000.

Given the economy’s weakness, Mark Zandi, an independent economist, recently warned that letting taxes rise now would be a bad idea. So did James Bullard, president of the Federal Reserve Bank of St. Louis, who told CNBC last week, “Increasing taxes while you’re trying to get the economy to recover is not a good plan.”

Indeed, Cristina Romer, the chairwoman of the White House Council of Economic Advisers, wrote a recently published paper with her economist husband, David Romer, in which they said, “Tax increases are highly contractionary.”

Top Democrats, including Ms. Romer, have their reasons for opposing an extension of those top-end tax cuts now.

While they favor extending the cuts for lower earners, they say the most affluent Americans would save a disproportionate amount of their tax cut and thus wouldn’t generate much growth. A budget office study ranked extending the Bush tax cuts at the bottom of a list of steps for expanding output and employment.

On the other hand, it would be among the easiest on which to reach agreement with Republicans. But for a party that has long held tax fairness as an article of faith, interest in that step remains small.

No Concession

With impressive discipline, Republicans have argued that Mr. Obama’s economic policies represent big-spending government gone wild. The argument starts with the 2009 stimulus law.

Never mind that Mr. Zandi, whose message on taxes Republicans have welcomed, was a co-author of a paper last week that found “very substantial” economic benefit from the $787 billion spending bill. Republicans said it represented a wasteful and damaging increase in deficits.

As it happens, allowing the top-end Bush tax cuts to expire would reduce the deficit over 10 years by $678 billion, an amount approaching the $787 billion figure, according to Mr. Obama’s budget.

Indeed, the former Federal Reserve chairman Alan Greenspan, who has sterling conservative credentials, has said that all the Bush tax cuts should lapse, to reduce long-term deficits.

Republican leaders show no sign of conceding that point. Since the Reagan era, belief in tax cuts — for stimulating the economy and curbing the size of government — has become as much an article of Republican faith as tax fairness is among Democrats.

The battle may get resolved, if not before the midterm elections, in a lame-duck session afterward. The December report by the president’s commission on deficit reduction may become a prod for bipartisan action.

For now, however, Republicans and Democrats prefer a skirmish. Both calculate that a tax battle will motivate true believers in their “base” to vote on Election Day.

In that calculation, a senior White House official acknowledged last week, both sides may be right.