Obama’s Fiscal Cliff “Victory”: Winning a Battle in the Midst of Losing the War?

Grover Norquist is happy. After the fiscal cliff deal was passed in the House, he pointed out that Obama blinked on his $250,000 line in the sand on taxes and that, by locking in the Bush tax cuts for 98% of Americans, the Democrats’ ability to defend the legacy of the New Deal has been greatly diminished. He’s right.

As David Horsey recently pointed out:

[T]he mandarin of the anti-tax movement, Grover Norquist, is coming out of this showdown with a big smile on his face, which should make Democrats wonder if their “victory” is a bit of an illusion. Norquist has kept Republicans in line for years by making them take his pledge to never, ever raise taxes.

On this deal, though, he gave them a pass. In fact, he expressed support for the final deal. Why? Because, as he points out, it gives Republicans what they have claimed to want ever since they implemented the tax cuts a decade ago: permanence. Not for everybody — the top 2% of Americans will be paying more — but 98% of taxpayers now have their tax breaks locked in.

Horsey’s view is echoed by other conservative commentators like Tom Rogan who, quite accurately, point out that:

In raising the income threshold for the top tax bracket to $400,000 for individuals and $450,000 for couples, the agreement accomplishes another critical conservative objective — limiting the federal government’s ability to extract wealth from taxpayers. This is an exigent need. Why? Because it is impossible to build an American welfare state on the back of a “rich” class who already provide over 70 percent of all tax revenue. By accepting a raised threshold on “richness,” whether he knows it or not, Obama has limited his ability to build the tax base necessary for a welfare state. Just look at the U.K., where because of state expenditures, income over $56,000 is taxed at a minimum level of 40 percent. This is why liberals are in uproar. The cliff deal has struck a hammer blow against their long term ambitions.

And if you think that this is just the work of Republican operatives rationalizing a defeat, consider Paul Krugman’s assessment of Obama’s big win:

For the reality is that our two major political parties are engaged in a fierce struggle over the future shape of American society. Democrats want to preserve the legacy of the New Deal and the Great Society — Social Security, Medicare and Medicaid — and add to them what every other advanced country has: a more or less universal guarantee of essential health care. Republicans want to roll all of that back, making room for drastically lower taxes on the wealthy. Yes, it’s essentially a class war.

The fight over the fiscal cliff was just one battle in that war. It ended, arguably, in a tactical victory for Democrats. The question is whether it was a Pyrrhic victory that set the stage for a larger defeat . . the G.O.P. retains the power to destroy, in particular by refusing to raise the debt limit — which could cause a financial crisis. And Republicans have made it clear that they plan to use their destructive power to extract major policy concessions.

One of the key reasons the deal might be considered a short term win by some in Democratic circles is because it did not include benefit cuts like the rumored “chained CPI” reform to Social Security. The deal also included a tax increase on the wealthy that makes our tax code more progressive than it has been since 1979. That said, an analysis with some historical perspective exposes this as pretty small potatoes.

As Annie Lowrey of the New York Times points out, this deal only raises taxes on the wealthy very slightly from historic lows:

By some measures, the tax code might now be the most progressive in a generation, tax economists said, while noting that every American is paying a lower burden currently than they did then. In fact, the total federal tax rate is still vastly lower for the very rich than it was at any point in the 1940s through 1970s. It has risen from historical lows, but is still closer to those lows than where it was in the postwar decades.

“We made the system more progressive by raising rates at the top and leaving them for everyone else,” said Roberton Williams of the TaxPolicyCenter, a research group based in Washington. “The offsetting issue is that the rich have gotten a lot richer.”

Indeed, over the last three decades the bulk of pretax income gains have gone to the wealthy — and the higher up on the income scale, the bigger the gains, with billionaires outpacing millionaires who outpaced the merely rich. Economists doubted that the tax increases would do much to reverse that trend.

Hence, the tax burden on the rich is still far closer to historic lows than to the levels they paid in the past when that revenue built the American infrastructure, funded education, wove our safety net, and much more. Since the late seventies there has been a massive redistribution of wealth upward. The new taxes on the rich do next to nothing to address that inequality in any significant way. Far from a big hit, they represent the political equivalent of a love tap.

Nonetheless, now that Obama has won this smallest of concessions, odds are that the right will engage in the same old shock doctrine politics of crisis to push for draconian spending cuts aimed at gutting the size of the federal government. Any step in that direction by the White House is a win for the right. And with his embrace of the crappy Simpson-Bowles austerity plan, Obama has already signaled that everything, including entitlements, is very much “on the table.”

As I have noted many times before in this column, by centering the conversation on deficit reduction, Obama is playing on Republican turf. This may be politically clever for him personally and appealing to what Krugman calls “the centrist fantasy,” but it may be fatal for the hopes of progressives.

Robert Reich has noted time and again that, “job growth and wage growth should be the central focus of economic policy, not deficit reduction. Yet all we’re hearing from Washington — and all we’re likely to hear as Republicans and Democrats negotiate over raising the debt ceiling — is how to cut the deficit.”

Reich makes this point because, as we slowly come out the Great Recession, the deficit is actually shrinking. And the threat of rising future debt largely comes from “rising health care costs” that would have been better contained with a single payer system rather than the corporate health care reform that is Obamacare.

But how to amend the Affordable Care Act to further contain health care costs will never be on the radar screen of this Congress. Instead, there will be more demagoguery about spending from the right, and we are apt to see real pressure to cut Social Security and Medicare as well as take the axe to nearly every other thing the government does.

This is because the real thing being debated here is the role of government in American society, and the Republicans, in the name of this politically constructed crisis, will try to extract concessions that would never be accepted by the majority of Americans if put to a vote. Why? Because most of the corporate anarchists on the right simply don’t believe in government. They want to roll back the 20^th Century, sound economics and the will of the American people be damned.

The question is whether the Democrats will have the spine and/or desire to hold the line against the extremists or whether the social Darwinist right will be answered by new Democratic calls for austerity lite–with progressives left on the margins. The taxes in the fiscal cliff deal simply did not result in enough revenue to sustain a robust progressive agenda and now the Republicans will never surrender more. The result will be another standoff around the debt ceiling.

And if this last round is any indication, I’m sorry to say, it looks like the Blinker-in-Chief will blink again.

That’s why Grover is grinning. For the “starve the beast” crowd, austerity rocks. It’s a winning hand for their long-term project to shrink government down to the size where it can be drowned in a bathtub. And every compromise Obama and the Democrats make in the debt ceiling talks will move the needle a bit more in his direction. Hence, in Grover’s estimation, “The president had all of the clout over the last two months and now it shifts to the good guys.”

Ah Barack, ah humanity!