The Price of Consensus: Obama and Congressional Republicans

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President-elect Barack Obama is calling for "swift and bold" action on his "American Recovery and Reinvestment Plan" to stop the hemorrhaging of the economy. He also wants to change the way Washington does business, to "turn the page" on the petty partisanship of the last decades. He's said to want [2]"substantial Republican votes" for the plan. Politico reports [3]he's looking for as many as 80 votes in the Senate, requiring that more than twenty Republicans climb on board. He's not only invited congressional Republicans to offer their ideas, he is building tax breaks into his plan that Republicans say would make it easier to support. (For updated reporting on this debate over the recovery package, see our Economy For All news page [4].)

Now Obama has proven his political brilliance time and time again, so he has earned the benefit of any doubt. But, frankly, this strikes me as a really dubious idea—both in terms of policy and politics.

In policy terms, the economy needs exactly what Obama calls for—swift and bold action. But inviting Republicans into the discussions insures only one thing: delay. Their leaders, Sen. Mitch McConnell and the perpetually tanned Rep. John Boehner, have already scorned the need for dispatch, with Boehner calling for "public hearings in the appropriate committees." Delay will simply embolden the lobbyists swarming to get their special interest built into the plan. Obama has a better chance getting a sound bill passed quickly than opening it up to the feeding frenzy that is the normal legislative process.

Second, Obama's aides say sensibly that they are looking to "do what works." But tax cuts come in a distant second to public investment [5] in actually creating jobs. We saw that last year when the rebate checks didn't have much effect. Much of the money sensibly was used to pay down debt and didn't do much to lift consumption or create jobs. Much of what was spent went to products made in China. In contrast, public investment will be spent, and it is more likely to create jobs here in America.

Reports are that 40 percent of the Obama plan, still being put together, will be devoted to tax cuts. Half of the tax cuts will be in the form of $500 tax credits for middle- and low-income workers. Since middle-class tax cuts were a centerpiece of the Obama presidential campaign, he's right to dismiss those who say these are designed solely to win Republican support. He's fulfilling a campaign promise that was designed to win voter support. And the money can be dispensed rapidly so whatever effect they have could be felt quickly.

But the other half of the tax package reportedly will go to businesses—$150 billion or so. These are said to include a Republican measure, blocked repeatedly last year by the Democratic Congress, to allow businesses to write off current losses retroactively against taxes paid on profits over the last five years. This will benefit significantly the very financial and housing companies that inflated profits, blowing up the bubble that brought us this mess. Worse, there is little reason to assume that giving a tax break to businesses that are losing money will do much to create jobs. Treasury and the Federal Reserve have pumped in trillions in equity and credit to banks without getting them to make loans. Most companies will use the break simply to bolster their books. Businesses hire people when the markets for their products expand, not because they have more money in their coffers.

There's also talk of a tax credit for companies that create new jobs. This sounds better, but it will mostly reward companies for jobs that they would have created anyway. And worse, it will generate a tsunami of fraudulent maneuvers designed to qualify for the break. A retail store firing clerks because business is off isn't likely to add someone to get the tax break. But the less scrupulous could well lay off three workers and hire back the one they meant to retain anyway to pocket the benefit. The administration will no doubt add provisions designed to discourage such fraud. But enforcement will be a nightmare with only one saving grace: effectively policing the provision will surely create more new jobs than the tax break itself.

Politically, Obama's generosity is unlikely to be rewarded. The congressional Republican caucus is more conservative and clueless than ever. They will see Obama's preemptive concessions as weakness, not generosity. They are already pocketing them and asking for more. Boehner is grousing about "the size of the package." Mitch McConnell responded [6] by calling for more tax cuts and peddling the lunatic notion that rather than providing grants to states and localities to avoid massive layoffs—perhaps the most effective dollar-for-dollar spending that we can do in terms of saving jobs—the federal government should loan them the money instead. Republicans don't want unemployment insurance to go to part-time workers, and oppose paying for health care for those who have been laid off. They are pushing for permanent reductions in capital gains and income tax rates for—imagine our surprise—business and the highest-income earners. These are the very ideas that helped get us into this hole.

My guess is that Obama's maneuver reflects a strategic decision, not a tactical one. Substantively, he wants a broad and inclusive package—"making sure [consumers] have money in their pockets," as well as "incentives for business" and "investing in job creating growth industries..." Politically, he seeks as broad a consensus as he can get on a bold measure in desperate times.

But he's likely to pay a price both in delay and in diminished effectiveness [7] for the plan that emerges. He'd be more likely to get a big and bold plan passed swiftly if he had put together his package, called on the Congress to pass it, invited Republicans to join or take the risk of standing in the way, while saving any concessions on business taxes until the end if he actually needed to round up the votes. I suspect that he'd have won just about as much Republican support that way.

Obama seems to be choosing a path that builds consensus at the potential cost of effectiveness. But if the plan fails, he'll take the blame no matter how many Republicans vote for it. And Republicans will attribute the failure to government spending, no matter how much of the plan consists of tax cuts.

We shouldn't treat this as a spectator sport. Americans should be getting in touch with their legislators—particularly Republican senators and conservative Democrats—and calling on them to support the swift action the country so desperately needs.