Home  »  Economy  »  Keith Hennessey: Obama Is Bluffing

Nov 29, 2012 Comments Off Pat Dollard

Keith Hennessey is the former Assistant to the U.S. President for Economic Policy and Director of the U.S. National Economic Council.

Excerpted from Keith Hennessey’s piece at KeithHennesy.com: I think the President is bluffing on his veto threat.

Conventional wisdom: To achieve his desired fiscal policy outcome (big tax rate increases on the rich), the President is willing to risk tax increases on all income tax filers. He is also willing to risk the political blame for middle class Americans paying higher taxes because he thinks he can shift most of the political blame onto Republicans. He is therefore willing to veto a bill he doesn’t like and bear the consequences of having no bill, if that’s what is needed to gain negotiating leverage. His veto threat is credible.

This conventional wisdom makes three key assumptions.

1.The President’s top economic policy priority is his fiscalpolicy goal (raising taxes on the rich).
2.In a veto / no bill / blame game scenario, the President can shift most of the political blame to Republicans.
3.He will make his veto decision on these two bases: fiscal policy and relative political blame.

Key flaw in the conventional wisdom: The President’s veto decision is not about tax increases or political blame; it’s about causing a recession in 2013.

I make different assumptions.

1.If there is no bill, the U.S. economy will probably dip into recession for much/most/all of 2013, and it’s impossible to predict whether such a recession would be short-lived.
2.A 2013 recession would be terrible for the country and terrible for the Obama Presidency. It would limit the President’s options across his entire policy agenda, economic and non-economic. And it could define and dominate his entire second term.

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Follow-Up Article: More On The President’s Veto Bluff

Yesterday I argued that the President is bluffing on his veto threat. Today I want to respond to some great feedback from friends and readers. Warning: discussions of negotiating strategy and tactics can get a little dense.

1. I agree that Senate Democrats would likely block any bill that the President would veto. This means the veto threat is important principally to reinforce Leader Reid’s efforts to hold his Democrats together as a unified bloc.

But if I’m right that the President thinks he cannot afford to risk a recession, then the President needs a new law. Whether a bill dies in the Senate or as a result of his veto, in either case no law –> fiscal cliff –> recession –> severe damage to the rest of the President’s agenda. My hypothesis is that the President is unwilling to take that risk, so he needs the House and Senate to pass a bill he can sign. I think my argument holds whether the veto would be actual or merely a tool to reinforce his allies stopping a bill in the Senate.

2. I agree that, were it not for the recession risk, many Democrats, possibly including the President, would think that no new law was a good fiscal policy outcome. Yes, the President and almost all Congressional Democrats say they want to extend current tax rates for the non-rich. But if all tax rates go up, future deficits will be $5.4 trillion lower. If the sequester is allowed to bind, deficits would be reduced by another $1.2 trillion over the next decade. This outcome, of no new law, would give the President a lot more fiscal flexibility. The deficit and debt problem would be far from solved, but he would have more room to propose new spending that I’m guessing he wants.

There’s an interesting intra-Democratic party tension here. Which is more important to elected Democrats: preventing middle class tax increases or having more room to increase government spending? The President insists he wants to prevent tax increases on the middle class, but it’s easy to believe that he, and especially some Congressional Democrats, would be happy to have such broad-based tax increases to finance their desires to expand government.

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