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Op-Ed: Obama Should Risk Going Off The 'Fiscal Cliff'

Negotiations between the White House and Republican leaders have reached a stalemate over how best to avoid going off the so-called fiscal cliff. Robert Kuttner, founder and co-director of the American Prospect, argues that the president should hold his ground in this debate, even if it means triggering the tax hikes and spending cuts.

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Transcript

NEAL CONAN, HOST:

And now, The Opinion Page; in fact a first, an Opinion Page series on the latest round of arguments on taxes and spending that have come to national attention under the ominous term the fiscal cliff. At the moment, the White House and congressional Republicans are at an impasse, and if that sounds familiar, that's because they arrived at a similar stalemate last year. When a subsequent supercommittee failed to reach agreement, the clock started ticking.

Unless the president and Congress make a deal by midnight New Year's Eve, cuts take effect across the board on what's called discretionary spending. That's effectively everything, except Social Security, Medicare and Medicaid. At the same time, the tax cuts approved under President Bush expire. Many economists believe the combination of tax hikes and spending reductions would trigger a new recession, which would mean a lot of job losses. This year, we'll hear from two analysts, then from a House Republican and a Senate Democrat.

We begin with Robert Kuttner, founder and co-director of The American Prospect. In an opinion piece for The Huffington Post yesterday, he quoted Winston Churchill who said that you can always count on Americans to do the right thing after they've tried everything else. At long last, he argues President Obama is doing the right thing. Bob Kuttner joins us now from member station WBUR in Boston. Nice to have you back on the program.

ROBERT KUTTNER: Neal, always a pleasure.

CONAN: And what's the president doing now that's different?

KUTTNER: Well, the president is being fairly firm. He realizes that he has public opinion on his side. Most Americans do not want to sacrifice Social Security and Medicare. Most Americans seemed to agree with him that taxes should be restored - tax rates rather should be restored to the Clinton-era rates on the top 2 percent rather than rates going up on everybody else. And so knowing that he has public opinion on his side and knowing that what's he's proposing I think is sensible economics, the president is hanging a lot tougher than he did during his first term having just won re-election.

CONAN: And so elections matter. This is one thing the president did run on - criticized him for not running on big ideas, but this is something he campaigned on all across the country, taxes have to go up on the rich.

KUTTNER: Yes. And I think the politics and the economics cut in the same direction. That is, it's better for the economy if you raise taxes on the top 2 percent than if you raise them on everybody, and it's also very good politics. So for once, the Republicans in the Obama era seemed to be painted into a corner where their remedy is unpopular politically, not necessarily very smart economically, and the president seems to be in a position where he's going to try and make the most of this.

CONAN: Well, you've been listening to the other side's arguments, as have everybody else, and that is, wait a minute, we don't need to raise tax rates. We can close loopholes and make up the money that way.

KUTTNER: Here's the problem with that. If you close loopholes - and, of course, that can mean anything and nothing. But one of the popular ways of so-called closing loopholes is you limit the total amount of deductions to something like 25 or 30 or $50,000, and that sounds good, but the problem with that is you end up raising taxes on the upper-middle class, the professional class, and very, very wealthy people end up paying almost as low a tax rate as they do now. Very, very wealthy people are where much of the money is, so you get more money by raising the top two rate brackets than you do by capping deductions, and you cut further down the income stream if you cap deductions.

CONAN: Capping deductions on things like your mortgage, for example.

KUTTNER: Exactly. And one way, by the way, of closing loopholes that would hit the very rich would be to tax capital gains at the same rate as ordinary income or at least at a higher rate than they are now. The reason that Mitt Romney paid a much lower rate than most Americans and Warren Buffett pays a lower rate than his secretary is that most of the income of the very, very wealthy is dividends, capital gains, other income on capital whereas most income from ordinary people is wages and salaries. So that would be a loophole that I would certainly favor closing. Obama, by the way, has proposed, I think, $600 billion of loophole closings in addition to over a $1 billion - I said billion. I mean trillion. As Everett Dirksen famously said, billion here, billion there, pretty soon, you're talking about real money. So the president wants to put the top two brackets back to what they were under Clinton, which was a very successful economic era. And then in addition to that, he wants to close some loopholes to raise about another $600 billion so that he doesn't have to cut Social Security and Medicare.

Now the need to have some reforms in Social Security and Medicare long term, that's something that almost everybody agrees upon. But I think the strategy of the Republicans and the strategy of the business leaders behind the group Fix the Debt has been to blur all of these separate issues into one grand bargain. I think it makes more sense to separate them. The question of long-term reform of Social Security, long-term reform of Medicare should not be jumbled up with a fairly straightforward question of whether to let the Bush tax cuts expire on the top 2 percent and how to prevent these automatic tax increases, spending cuts that were really imposed on President Obama by the Republicans in the 2011 budget deal as the price of letting the debt ceiling go forward.

CONAN: Well, more on that in a minute. But if you listen to someone like Grover Norquist of the anti-tax campaign or anti-tax increase campaign, he would say we need to make a grand bargain because if we don't tie that middle class tax cut to everything else, to cuts in Medicare and Social Security and Medicaid, the Democrats will never do that.

KUTTNER: Well, Grover Norquist's 15 minutes may be up. I mean, the problem with this pledge that he has extract from Republicans that you can never vote for a tax increase is that you often vote for tax cuts because you need to do that to stimulate the economy. Then when the crisis passes, if you try to restore tax rates to what they were pre-crisis, you say, oh, no, that's violating Grover's pledge, that's a tax increase. So that's playing kind of cute, it seems to me. And I don't think the logic holds that you have to tie these changes in tax policy to reforms in Social Security and Medicare or the Democrats will never do it because they're two completely separate things.

Social Security is really in rather good shape long term if we can just get job growth up. After all, Social Security is financed by taxes on payrolls. If you get wage growth, payroll tax receipts go up, and the Social Security year of reckoning recedes further and further into the future. Medicare is a very tricky, complicated, byzantine program that is affected by the rate of health inflation in the rest of the economy. But the idea of having a kind of a midnight grand bargain where you slash Medicare, slash Social Security, and that's the price for the Republicans reluctantly agreeing to a tax increase on the richest 2 percent of Americans, I think that's bad politics and it's bad policy.

CONAN: Well, then, if they don't agree, and you need the House of Representatives to go along and there's a lot of people there in the House of Representatives, Republicans who say they will never do this no matter what, if they don't agree, then you go over that fiscal cliff. And, well, cliff is probably an inexact term and these cuts don't go in effect immediately or they don't have to. And the tax increases don't go into effect immediately or they don't have to. But in any case, the markets are likely to react very badly. A lot of people are likely to lose their jobs.

KUTTNER: Well, I think President Obama is willing to play hardball this time because public opinion is very, very much on his side. And the more you smoke out what the Republicans are really for, they are for sparing the richest 2 percent of people any tax increase, and in exchange they want to cut Social Security and Medicare. About 20 percent of Americans agree with that position according to the public opinion polls. The more Obama smokes out the fact that that's really their position, the more public opinion drives them to change the position. And if these tax increases and spending cuts buy for a few weeks and markets decline for a few weeks, it's really not the end of the world. So the president has a very, very strong hand. And the only question, I think, that worries liberals like me is whether he's going to fold a very strong hand.

All the indications are based on Secretary Geithner's comments on the talk shows is that the president likes having the strong hand, likes having public opinion on his side, likes being the defender of Social Security and Medicare, likes taxing the top 2 percent rather than raising everybody else's taxes and that he's not going to fold a strong hand. So this is going to be very interesting to see how this plays out.

I think what worries me a little bit is the endgame where the Republicans reluctantly agree to raise taxes on the top 2 percent and they say to the president, hey, this was very, very hard for us to back down on a core position. Now what are you going to do for us? And then at that point, the pressure will be on Obama to throw them some kind of a good-sized bone on Medicare and on Social Security. I'm not worried about the tax hike. I'm more worried that Social Security may get thrown into this, to inappropriately bad politics, bad policy in order to consummate this grand bargain, which never should be a grand bargain. These are separable issues.

CONAN: Social Security, as you say, is more solvent for more years than any other part of this if you believe that the Social Security Trust Fund actually exists. It's been raided by previous Congress. It's a fiction, they say.

KUTTNER: Well, it's a buffer. Most of what pays for Social Security does not come out of some giant trust fund. Your Social Security taxes, my Social Security taxes pay for the retirement checks that go to your parents and my parents and other people's parents. But for the most part, the system is in balance for at least 20 to 25 years. And if we can just get wages back up so that more money comes in in the form of payroll taxes it will be in balance for many decades. The trick here is to get a recovery going, not to create austerity for the sake of saving Social Security, which only makes Social Security's balances that much worse.

CONAN: We're talking to Robert Kuttner of The American Prospect. You can find a link to his op-ed that was published in The Huffington Post at our website. Go to npr.org, click on TALK OF THE NATION. We'll be talking with other analysts with a House Republican and with a Senate Democrat this week about the fiscal cliff. You're listening to TALK OF THE NATION from NPR News.

And, Bob Kuttner, the politics if you go after the fiscal cliff, if everybody sticks to their guns and nobody gives up, after the fiscal cliff, you're not talking about anybody voting for tax increases. You're talking about people who's trying to vote for tax cuts, and you're not talking about spending increase - spending cuts. You talk about spending increases.

KUTTNER: Well, we're talking about - if the president has his way, we're talking about tax increases on the top 2 percent, and we're talking about leaving the present rates at their current level. That is, if you do nothing the Bush tax cuts expire on January 2. What Obama proposes is to have them revert to the pre-Bush rate for the top 2 percent and have them stay low for everybody else. So he's not talking about an additional tax cut. He's just talking about...

CONAN: No. I'm saying after January 2, he would be.

KUTTNER: No. After January 2...

CONAN: He would say restore the Bush cuts for the middle class?

KUTTNER: Well, but the Bush cuts for the middle class are currently in existence. They would never have gone away.

CONAN: They wouldn't be after January 2. They would've expired.

KUTTNER: Right. But for fiscal '13, they would be exactly the same as they were for fiscal '12. They would just stay put. And he is basically saying he might not have agreed with it at the time, but now that Bush lowered tax cuts on the bottom 98 percent, the economy is so fragile that he doesn't propose raising those to the pre-Bush levels for anybody except for the top 2 percent. I actually think that's pretty good economics. And I think - what I worry about, what Paul Krugman worries about, what some other economists worry about is that if you go to austerity prematurely, if you go to belt-tightening before the economy is in a robust recovery - and I think by definition, if unemployment is still almost 8 percent and it's much higher when you count people who want full-time jobs but can't find them - if you tighten everyone's belt at that point, you run the risk of kicking the economy back into a recession.

It may not be as big a cliff as the fiscal cliff, so-called. But it's still too big a cliff for what the economy can withstand right now. So I think we ought to be placing our money on what is going to create a strong recovery and not on belt tightening.

CONAN: But again, if Republicans fail to agree, you will go over that fiscal cliff and then the markets will react. You will go into another recession. And a lot of people will lose their jobs.

KUTTNER: Well, absolutely. And the fiscal cliff was a gun that was put to the head of both parties, in particular the Democratic Party, to force them to agree to cuts that they otherwise would not agree to. I mean, the fiscal cliff is sometimes treated in the media as if it were a kind of asteroid about to strike the Earth. It's not a natural catastrophe. It's an unnatural catastrophe. It's a catastrophe that was created as a strategy by the Republicans in 2011 to create this artificial day of reckoning when you would put pressure on the Democrats to agree to tax policy and social insurance policy that they otherwise would not go along with.

And what's interesting is is that this has mostly backfired on the Republicans. It has brought to light the fact that if the Republicans had their druthers, they would cut Social Security, cut Medicare in order to preserve lower taxes for the top 2 percent. It turns out that's monumentally unpopular. And that's why the politics cut in President Obama's direction.

CONAN: They say they would also do it to start paying down the debt, and that is pretty popular.

KUTTNER: Well, in theory, it's pretty popular. But if you say to people, would you like to take a cut in your Social Security and your Medicare in order to pay down the debt, most people would say, no, thank you. And I don't think it's good policy. I mean, I think when you have a very fragile economy, if you can get their economy - the economy into a strong recovery, the recovery will start paying down the debt. That's what happened after World War II. We had a much, much higher debt-to-GDP ratio.

And, you know, in 1945, they did not appoint a Bowles-Simpson commission to target the debt ratio in 1955. They said, how can we make sure we don't sink back into the Great Depression when we have 12 million GI's returning home? And instead of tightening everyone's belt, they doubled down on government spending with the GI Bill, with the Marshall Plan, with highways, with housing. And the prosperity after World War II lowered the debt ratio. So it seems to me rather than obsessing on the debt ratio, we should be focusing on how to get a strong recovery going, put people back to work so that they are paying taxes again. Those tax dollars can go to defray the debt.

CONAN: We just have about a minute left. What's your best guess?

KUTTNER: My best guess is that we briefly go over the cliff, that President Obama sticks to his guns, that the Republicans are forced to back down on taxes and that in order to feel that that gesture is reciprocated, President Obama - and I hope this doesn't happen, but I think it will - will rediscover his inner bipartisan and will give some moderate concession to the Republicans that he really doesn't want to give with modest cuts in Social Security and Medicare.

And by the way, you can get a lot of savings in Medicare without cutting benefits. The first thing I think he ought to do is change the law so that Medicare can negotiate bulk discounts with drug companies the same way that the VA and Medicaid can do. This was prohibited as part of President Bush's Medicare drug benefit. That would get you almost $300 billion. That's a lot of savings.

CONAN: Bob Kuttner, co-founder, co-editor of The American Prospect, a senior fellow at Demos. You can find a link to his column at our website at npr.org, click on TALK OF THE NATION. With us today from member station WBUR in Boston, thanks, Bob.

KUTTNER: Pleasure, Neal.

CONAN: Tomorrow, more of our conversations on the fiscal cliff, and we'll talk with retiring U.S. Senator Joe Lieberman. It's the TALK OF THE NATION from NPR News. I'm Neal Conan in Washington. Transcript provided by NPR, Copyright NPR.

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