On today’s edition of Coffee and Markets, Brad Jackson is joined by Pejman Yousefzadeh and Elizabeth Blackney to discuss what a debt ceiling deal might look like, if Republicans should even take it, and what impact it may have on 2012.
Jackson: On the show today Pej and Elizabeth are here to discuss the latest on the debt ceiling negotiations in Washington, we’ll talk about what a deal may look like if Republicans should even take it, and what 2012 voters may think of all this D.C. style wheeling and dealing. I’m your host Brad Jackson and you’re listening to the July 6, 2011 edition of Coffee and Markets.
Gang, the debt ceiling deadline is approaching and it’s all the talk in D.C. Everything is centered around coming up with a debt ceiling compromise and figuring this all out before the doomsday of August 2nd, I believe. There’s a lot of talk from both sides. Republicans wanting tax cuts and cuts to, you know, Medicaid, Medicare, Social Security, et cetera, and the Democrats wanting tax hikes. Is there going to be any sort of solution, I don’t know.
But Pej, I want to start with this. David Brooks came out in The New York Times on the 4th of July, this was a wonderful way to say happy Independence Day, and punched at Republicans saying that this was a no brainer move for them to make compromises on the debt ceiling, but he had no faith that they would do it. What is your thought on this?
Yousefzadeh: Well, I still think that we’re going to come to a debt ceiling deal, at least a short term deal if not a long term comprehensive one, before August 2nd rolls around. At least I hope we will. I think the chances are good that we’re going to avoid a default, because I think everyone privately whatever they say in public is terrified of a default.
My concern is, first of all I mean independent of what Brooks, how Brooks judges the current political fiscal policy situation, there certainly is, one of the worst things you can do as a party or as a movement is fail to take “yes” for an answer. And if you’re being offered a significant amount of spending cuts and basically all you’re being asked to do in return is to close some loopholes, and I’m not necessarily saying that this is all the Republicans would be asked to agree to, then if you say no to that, then quite simply you may not be in a good position to accept a good deal later on down the line.
Jackson: Pej, let me stop you for a second. When people talk about closing loopholes, and this is something that McCain and Coran (phonetic sp.) came out and said they might be in favor of this weekend, closing loopholes although it sounds good in nature, is that not often tantamount to a tax increase? If you have a “loophole” that is then closed and you have to pay additional tax on that, would that not hurt companies and then perhaps the job market as a whole?
Yousefzadeh: Well, it depends upon what you’re being asked to do. I mean, if you’re being asked to simplify the tax system and we’ve talked in the past about tax reform, any kind of comprehensive tax deal, tax reform deal is going to involve closing loopholes in order to simplify the system, even as you reduce marginal rates. I think the key is, what does the marginal rate system look like?
If you hike marginal rates, then you engage in distortionary tax policy which is going to have a very powerful and negative impact upon the economy. But if you’re closing loopholes and you’re not increasing marginal rates, in fact you end up decreasing marginal rates, then I don’t think that there’s going to be as much of a problem. I mean, the devil is in the details and you can’t —
Blackney: Can I jump in here real quick, Pej. I want to get clarification, because you know, this is not always my strong suit because I’m just a normal person so I have to ask a normal person question. I understand, and I agree with the premise that Brad is laying out is that ultimately what we’re talking about here are tax increases. If we’re closing a loophole as honorable as that sounds like, loophole sounds like, it sounds to me like if you’re a small business owner who is just filing their taxes according to the tax structure that we have in place today, it’s not necessarily a loophole. That’s, you’re just following the law.
And so I think that this is where we get into the kind of semantic and partisan conversation is that small business owners who are by far the driver of the job creation in the American economy hear loophole and they just start to roll their eyes and get ticked off, because they’re not at all doing something wrong. Which is kind of the premise that Democrats want to force down everybody’s throat, that everybody is doing something nefarious when in actuality they are just filing their taxes according to the Tax Code that we have in place.
If we’re talking about fixing the Tax Code, shouldn’t we be talking about how to simplify this, in removing that kind of hyper-negative language that immediately serves to drive a wedge between left and right, or corporations versus small corporations versus sole proprietorships, or whatever that, is in that suit. It just seems to me like we’re relying on language that isn’t going to do anything but create more problems when we’re trying to reach a compromise. Somebody is going to have to put on their big pants first and somebody is going to have to just stop. Because if it’s always going to be the back and forth, we’re not ever going to get to a compromise. Don’t you think?
Yousefzadeh: I don’t think that there’s anything dishonorable about a loophole. If there’s a loophole and it’s written in the law and you don’t take advantage of it, then quite frankly you’re a chump. But if we’re talking about simplifying tax policy, then one of the effects of —
Blackney: But they’re not taking advantage of it. They’re just filing their (unintelligible) —
Yousefzadeh: But there’s nothing wrong with —
Blackney: — it’s not really a loophole.
Yousefzadeh: There’s nothing wrong with taking advantage of it. I encourage of them to take advantage.
Blackney: Well, right.
Yousefzadeh: I, if —
Blackney: Oh, but they’re not taking advantage of something. There isn’t, they’re just filing their taxes according to the law.
Yousefzadeh: I don’t think there’s anything negative or derogatory —
Yousefzadeh: — about saying the word “taking advantage of.” I mean it’s, I’ll take advantage of a 60 mph limit on the highway by going 60 mph. I’m complying with the law. What I’m talking about here is what kind of tax structure we’re going to have first of all in order to come to some sort of a debt ceiling compromise. And secondly, in order to come to some sort of a comprehensive agreement which we need beyond the debt ceiling fight which is tax reform. I mean, again our stupid, chaotic, anarchic, look like it was written by a bunch of people who didn’t have the ability or the willingness to consult with one another tax policy is filled with exceptions, and exceptions to the exceptions, and has become so incredibly complicated that compliance costs are raised extraordinary. And if you can —
Blackney: Okay so Pej, wouldn’t you say then that, you know, all of this language, so again I’m asking you about the language of the public negotiations. Obviously not private negotiations , but the public negotiations and the partisanship that’s inherent in this discussion. Doesn’t it make more sense for Congress to be blaming themselves instead of blaming business? Because businesses and corporations didn’t create this tax structure.
Yousefzadeh: I don’t disagree. They —
Blackney: Congress after Congress have done that.
Yousefzadeh: I don’t disagree and they should blame themselves. They should blame themselves because they’ve given us a stupid tax policy. They should blame themselves because they’ve given us —
Blackney: Do you also agree that businesses, that this is, the businesses we have, the skepticism in the business community about the, you know, the ability of Congress. And I mean, this drives apathy nationally, don’t you think?
Yousefzadeh: Well, the skepticism about the ability of Congress has been going on since Mark Twain and Will Rodgers decided to make Congress the butt of God knows how many jokes and I don’t expect it’s going to go away any time soon. But when we’re talking about the immediate problem of how best to resolve the debt ceiling fight, I’m not privy to the negotiations between Republicans and Democrats and there’s always the possibility that whatever negotiations take place could end up getting scuttled or torpedoed by one side reneging on a promise.
But if you have a situation where there are significant amounts of spending cuts that are being offered, and a reduction or a stop in the growth of government, and what you’re being asked to give up in return is something that doesn’t amount to an increase in marginal tax rates which would actually harm the economy, then I think in general that’s a good deal.
Now again, it really does depend what the specifics are, so I don’t want to wed myself to a deal, especially a deal that hasn’t taken place yet, much less one that I’m not fully familiar with the details on. What I do remember is this, in the 1990s after the 1994 elections which swept Republicans in power in the House and Senate, there immediately became a fight between the Republicans in Congress and the Clinton Administration. The Republicans said, you’ve got to balance the budget in seven years. And the Clinton Administration said no, and the Republicans said yes, and the Clinton Administration said no. And this went on for a while until Bill Clinton addressed the nation and said okay, we’ll do a seven year deal. And Republicans acted like the dog that finally caught the fire truck, they didn’t know what to do. I mean, they didn’t have the wherewithal or the intellectual suppleness to go out and say hey, a Democratic President just agreed with us, we finally got him to see it our way that you need to slow the growth of Government. And you need to have a balanced budget in seven years. This is a huge win for us. Great. Fantastic. We are making terrific progress and go out and claim credit for this deal. Instead they said, oh my God, he said yes, what are we going to do now?
And the point is, you know, you can’t have a negotiating position that is defined purely by opposing the other side. And just as a practical matter as well, you know, whatever deal comes out there is going to be a lot that we don’t like. Even if we end up liking the final result, which is avoiding a default which would be catastrophic, there is still going to be a lot that we don’t like. And there’s still a lot that we’re going to be, we’re going to have to swallow and it’s not going to taste good and it’s not going to feel good. But —
Blackney: Okay. Can I ask you another question?
Yousefzadeh: — at the end of the day there are going to be Democrats —
Blackney: Go ahead.
Yousefzadeh: — and there are going to be Republicans, and there are going to be liberals, and there are going to be conservatives, and no side is going to legislate the other out of existence. And so at the end of the day somebody is going to have to come up with, come out with something to say okay, you know, I can get my constituency and I can get my members to support this deal.
Now, if that turns out to be a deal where Republicans get trillions of dollars, even over 10 years, in spending cuts and a reduction in the growth of Government and a stop in the growth of Government, then you know, I have to say I’m inclined to take that deal. It’s an extraordinary thing and it’s the kind of thing that conservatives and right of center libertarians have yearned for for decades.
Blackney: Well, let me ask you another question. From the Republican side of the aisle, you know, I think that one of the things that concerns me and you know, this is where my inner establishment rhino I think probably comes to the fore, is my concern over the public language. Not, we don’t know what’s going on privately but the public’s negotiations. My concern with that has been that we have this no taxes, no taxes, no taxes, no taxes, no taxes pledge that a lot of folks signed with Grover Norquist and ATR. Do you see that kind of purity test as a problem for the negotiations of this deal?
Yousefzadeh: I see any kind of purity test as a problem with negotiations for any deal. I think it’s great to be principled. I have principles. I have really, really strong powerful principles that drive me. And my vision of a perfect world is far, far different than anything that’s going to come out from Washington. But you know, one side or the other is not a dictator here. The Democrats have the Senate and the White House and the Republicans have the Chamber of Congress in which, according to the Constitution, all spending bills originate, the House of Representatives. So, no side is going to get what it wants.
And the other thing we have to remember is this, you know, we think of Congress as this, either this august body of legislators or this gallery of rouges and scoundrels. At bottom what it really is is a high school. You’ve got 535, no. No. And this is not meant as a joke at all. At bottom what Congress is is a high school. You have 435 members of the House of Representatives. You have 100 members of the Senate. It’s a really, really small group. These people interact with one another all the time, and at the end of the day they are going to want to deal with one another on things like the debt limit ceiling, because they’re going to have to deal with one another later on on something else. And it’s not big enough or atomistic enough to be able to afford having one side tick the other side off and not offer them an honorable way to accept a particular deal, but to, you know, to treat negotiations as a win lose proposition instead, it’s difficult to have that kind of situation and then expect progress in, you know, say what our defense policy looks like. Or progress in say what our trade policy looks like.
Jackson: Pej, let me back you up. If Republicans agree to a debt ceiling deal that includes some sort or tax hike provision, are they not going directly against what they were elected for and what the majority of the public doesn’t want, even if it gets them a debt ceiling deal?
Yousefzadeh: If, well. Again we’re going back to whether or not we’re actually hiking marginal rates and distorting the economy or whether we’re closing loopholes and we’re not. You know, on the one hand —
Jackson: Okay. But think about, hold on.
Yousefzadeh: Each side though is going to end up having to take a step back from purity if we’re going to have a deal. Democrats are going to have to come and say, okay we’re probably going to have to have Medicare cuts. Okay, we’re probably going to have to have some kind of means test for Social Security. And today, you know, this was pretty extraordinary, John Paul Stevens, the retired Supreme Court Justice who at the end of his tenure very much identified with the liberal wing, came out and said and he’s 91 years old, and he came out and said look, people are living longer than they did when Franklin Roosevelt passed Social Security. In fact, Franklin Roosevelt when he passed Social Security the actuaries basically tied Social Security payments to life expectancy. So, where the Government didn’t have to pay out much. Now we’re going to have to rethink what our retirement age should be, because people are living longer and they’re working longer.
So, you are seeing a fundamental shift in what the left thinks of entitlement programs. And I think it would be folly not to take advantage of that. I mean, you know, if we accept that Ronald Reagan is some kind of tremendous role model for the Republican Party, and I think he should be, then we have to accept the fact that Ronald Reagan didn’t negotiate with the belief that it was either his way or the highway. I mean, Tip O’Neal, in fact, praised him for saying, you know, I’ll take 70% of what I want this time. Or I’ll take 80% of what I want this time. And Reagan responded to that praise by saying yeah, and then next time I’ll go back for that 20%. And maybe I’ll only get 80% of that, but that’s still significant. I mean, there is going to be no side that comes out with its purity intact at the end of any kind of deal but —
Blackney: But what do you think the consequences are going to be for Republicans? When we’re looking at 2012, you know, we have our House and Senate races, and state races, they are going to go on and yet they may not meet that purity test. But, you know, what are hard core conservative groups, you know, whether it’s the folks at Freedom Works or other 527’s, or people who are really concerned about having our politicians hold up those pledges that they sign on. I mean, where is that language? What do we have, what do you suggest these members of Congress tell their constituents who say look, you said no new taxes and now you’re raising our taxes. I mean, all of this sounds fine, well and good, but there are going to be a lot of very upset people that, you know, I know that we can’t let the perfect be the enemy of the good, but I also know that there is more than one way to skin a cat. And we’re going to have a lot of very upset people if Congress just blows off what these people say.
Yousefzadeh: But I don’t think —
Blackney: (Unintelligible) not a bunch of, Pej. Hold on. You went on for quite a while, so let me talk. When we look at how the average person is going to view this, not the esoteric or academic argument, which I’ll stipulate makes total sense. But you know, reality dictates that at some point they’re going to make a deal. I get that.
But the average person, an average voter, or even folks who are super active, when they get word that a deal has been cut that goes against what these people were elected to do, you know, we still have of, by and for the people. And a lot of average citizens are going to be very upset if members of Congress violate the tax pledges, or violate just their own word to go ahead and cut this deal. I’m not talking about the technical details. I’m asking you about the political ramifications for members of Congress who cut a deal that is contrary to the principles that they were elected to uphold?
Yousefzadeh: Well first of all I think that the political ramifications are going to be a lot less in a presidential election year when the Republican Party is very, very motivated to beat Barack Obama. And so that in and of itself is going to help keep a Republican coalition together. Secondly, I think that Republicans are going to be forced to go out and tell people, look, we didn’t raise your marginal tax rates. What we did was close loopholes, if that happens. What we did was close loopholes, but we didn’t raise your marginal tax rates. We didn’t agree to tax increases that are going to harm the economy. And ultimately any kind of tax amplification is going to entail closing loopholes. But at the end of the day what that means for you, the voter, is you don’t have to jump through all these hoops and hire all these accountants and hire as many lawyers in order to figure out what the tax laws of the country are.
And what’s more, they are going to tell the voters that we avoided a default of the debt. And by doing that we avoided things like having your credit cards increase, in terms of interest rates, or having your mortgages increase in terms of interest rates, or perhaps even your student loans increase in terms of interest rates, because all of that is dependent upon treasuries. Upon what the Treasury price is. You don’t want an economy where credit card interest rates skyrocket, and mortgage interest rates skyrocket because we default on our debt. And if we had that situation where we default on our debt, then remember 2008, remember how bad it was. This will make 2008 look like a picnic. A default on the debt will make 2008 look like a walk in the park. It will make it look like a cocktail party. It will make it look like your best first, second, third, fifth, 27th, 84th, and 966th date ever. That’s how bad it will get, and we prevented that from happening.
And in the course of doing that, we got trillions of dollars in cuts, maybe they are spread out over 10 years, but still, that’s huge. And we slowed, and stopped, and perhaps even reversed the growth of Government. And we gave you over 90% of what you want. And it’s a Presidential election year where we’re going to have a chance to elect a Republican for President of the United States. Overall I would say to the Republican voter, you got a damn good deal. I suggest you take it. It wasn’t 100% of what you want, but even 95, but 95% you’re going to thumb your nose at that? That’s what I would say. And I think that’s the only thing that can be said.
And if Republicans want to say no, that’s not good enough, that’s their right. That’s their privilege as voters. They can say that, but they’re going to have to do that and run the risk that the next time these kinds of fights come around, the other side gets the upper hand.
(End of Podcast)