The Next Game of Economic Chicken: Taxing the Rich

By Robert Reich, Robert Reich's Blog

10 November 12

ith the election behind us I had hoped we'd get beyond games of chicken. No such luck.

But first you need to understand that the game of chicken isn't about how much or when we cut the budget deficit. Or even whether the upcoming "fiscal cliff" poses a danger to the economy.

The non-partisan Congressional Budget Office on Thursday warned that the automatic tax increases and spending cuts scheduled to start in January amount to too much deficit reduction, too soon. They'd put the economy back into recession, and push unemployment to about 9 percent. But the CBO also warned of an economic crisis ahead if the United States doesn't stem the growth of the nation's exploding deficit.

Get it? Reduce the budget deficit too quickly, and we're in trouble. But fail to address the deficit, and we're also in trouble. It's really a matter of timing. That's why I think any deal should include a trigger mechanism that begins to cut spending and raise taxes when the economy has two consecutive quarters of 6 percent unemployment or less, and 3 percent annualized growth or more.

In reality, though, the upcoming game of chicken isn't about any of this. It's over the clearest issue President Obama and Mitt Romney fought over: whether taxes should be raised on the rich.

Democrats and Republicans are now maneuvering to maximize their bargaining leverage when they sit down next year to decide this.

On Friday the President called on called on Congress to immediately make permanent the tax cuts for Americans who make less than $250,000 a year, while at the same time allowing tax rates to rise for wealthy Americans - and then making those rates part of a broader deal next year.

The President knows congressional Republicans won't agree, but he needed to set out his central demand because it's the one thing that can fairly be interpreted as a mandate from the election.

So what's going to happen? Bear with me, because this gets interesting.

Some Democrats (and some White House strategists) figure they'll have most bargaining leverage in next year's deal if they do nothing now - allowing tax rates to rise automatically on everyone after the first of the year. Then they plan to offer Republicans a deal that reduces taxes on people earning less than $250,000 - which would be retroactive to January 1st.

Republicans would have to choose between a tax cut on the middle class or no tax cut at all. Democrats believe Republicans would have to take the deal. Even Grover Norquist would be hard-pressed to come up with an argument against it.

Some Republicans, meanwhile, figure they'll have more bargaining leverage if they keep things as they are until late January or February.

What's magical about late January and February? That's when the debt ceiling has to be raised again, which means that's when Republicans can once again threaten to vote against raising it. (In theory, we'll hit the ceiling at the start of January, but the government can juggle payments and take various "extraordinary measures" for another month or two beyond that - maybe even until March - before it could no longer be able to borrow enough money to pay its bills.)

This is the thinking behind House Speaker John Boehner's proposal earlier Friday that all the tax cuts - including those for the rich - should be extended until next year, until there's a deal. "I'm proposing that we avert the fiscal cliff together in a manner that ensures that 2013 is finally the year that our government comes to grips with the major problems that are facing us,'' Boehner said.

So who blinks first? Democrats who don't mind going over the cliff because they'll get a better final deal - and the deal will be retroactive to January 1st so it's not really a cliff at all but more like a little hill? Or Republicans who want to extend the Bush tax cuts beyond January 1st, until we get sufficiently close to the debt ceiling that they can once again threaten the full faith and credit of America?

As I said before, I had naively assumed the election would put an end to these games, but obviously not. Yet Obama and the Democrats are holding most of the cards now. Let's hope they use them.

Robert Reich is Chancellor's Professor of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written thirteen books, including "The Work of Nations," "Locked in the Cabinet," "Supercapitalism" and his latest book, "AFTERSHOCK: The Next Economy and America's Future." His 'Marketplace' commentaries can be found on publicradio.com and iTunes.

Obama's Next Inner Circle: Who Will Fill the New Cabinet?

By Eleanor Clift, Daily Beast

10 November 12

With Hillary Clinton and Tim Geithner bowing out, the guessing game has begun. From State and Treasury to the Pentagon, a look at the options-including Republicans.

peculating on a team for President Obama's second term is like working a jigsaw puzzle. Move Chief of Staff Jacob Lew to Treasury, which is widely anticipated, and you have to find the right person to fill Lew's demanding job. As Obama reflects on his choices in the coming weeks, he will move people around within the administration wherever he can, reward loyalists when he can, and recruit a Republican or two to make good on his Election Night promise of reconciliation with the opposition.

"Obama needs to send a signal that what he said with regard to reconciliation is real," says Republican strategist Brad Blakeman, who served in the Bush White House. "Bringing new people into the cabinet and to the White House provides the president with a new team to fight old battles from a new perspective."

The top-tier cabinet posts get the most attention-Treasury, State, Defense, and Justice. Treasury seems settled. Early talk has faded about installing Erskine Bowles of Simpson-Bowles deficit-cutting fame. While his appointment would send a strong signal to the markets that Obama is serious about deficit reduction, the Democratic base wouldn't be happy, and it's too soon to start an argument with the folks who elected him.

Hillary Clinton says she will stay at State until her successor is confirmed. The two leading candidates are U.N. Ambassador Susan Rice and John Kerry, chairman of the Senate Foreign Relations Committee. Rice has taken a hit from her insistence on five Sunday shows days after the attack in Benghazi that it was the result of a spontaneous demonstration, which proved untrue. A Democrat with ties to the White House says: "Obama is feeling feisty. He wants her. She'll get knocked around (in the Senate-confirmation process), but he thinks she can handle it."

The intelligence community has taken responsibility for the talking points that Rice repeated, acknowledging they were "stale," says former State Department spokesman P.J. Crowley. A report on the matter will be issued next month, and Crowley thinks that's time enough to draw conclusions. If Obama goes ahead with Rice, that would test the political climate in the new Senate as well. "It's one thing to hold up a judge, but when there are serious crises in Syria and Iran, holding up a secretary of state is another matter."

Rice has her critics and they support Kerry, who many say deserves the top post at State in return for his yeoman service on the Foreign Relations Committee. Appointing Kerry would open up his Senate seat and plunge the administration back into another contested Senate race potentially with freshly defeated Scott Brown, who could suit up for another run. The prospect of that contest would likely bring Gov. Deval Patrick out of the statehouse to hold the seat.

With both Kerry and Rice facing obstacles, a third name popped up in the chattering classes on Thursday: National Security Council adviser Tom Donilon, who could slide into State without a ripple. The problem with Donilon is that Obama likes a big personality in the job, think Clinton and Condi Rice, and Donilon is a behind-the-scenes kind of guy who rarely goes on television.

Leon Panetta is willing to stay on at Defense to shepherd the department through the fiscal cliff, and Michele Flournoy, former undersecretary of defense for policy, is a leading contender to succeed him. There's never been a woman in that spot, and Flournoy is highly regarded. "She's brilliant, smart as hell, has deep knowledge across the defense issues-personnel, weapons systems, strategy, she knows how to run the Pentagon, and she's very well liked," says a senior Democrat who doesn't want to be quoted gaming out the president's choices. Flournoy could also become national security adviser should Donilon move on.

Another contender: former Republican senator Chuck Hagel. Obama really wants to recruit Republicans, but there aren't many that would be a comfortable fit. GOP Senator Richard Lugar's name comes up as a likely ambassadorial appointment.

Several cabinet members have signaled their wish to stay in their posts at least for a while. They include Attorney General Eric Holder, who wants to be in place to mark the 50th anniversary of landmark civil-rights legislation passed in the '60s. Homeland Security Secretary Janet Napolitano will stay. Friends say that she would like to move over and become attorney general if Holder steps down, the kind of in-house transfer that Obama relishes.

An intriguing name circulating for secretary of energy is John Podesta, founder of the liberal think tank Center for American Progress. Clean energy is his passion, and he would bring political smarts along with policy smarts. He was chief of staff during President Clinton's second term.

Lastly, the Obama campaign staff can probably write their own tickets in the administration. The indefatigable Stephanie Cutter, who defended Obama on the cable news shows, could succeed David Plouffe at the White House should Plouffe leave. Jim Messina, the Obama campaign manager, is a potential contender to become chief of staff, but more likely, says a friend, "he'll write a book and make a ton of money."