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Democrats Scattering on Economy as Republicans Demand More Tax Cuts

On this week’s Fox News Sunday, John McCain (I know, John McCain on a Sunday show, stop me if you’ve heard this one before) offered precisely the argument I thought Republicans would make about the proposed Obama Administration tax cuts:

McCain, who just survived a primary challenge by former Rep. J.D. Hayworth, said he endorsed the idea of a payroll tax holiday that President Obama is reportedly considering. But McCain also said the country needs the “certainty” of knowing the Bush tax cuts won’t expire.

“Then maybe the American people will have some confidence,” McCain said on “Fox News Sunday.” “The American people have lost confidence in this administration’s ability and this president’s ability to get this economy going again… You can argue about jobs created, jobs saved, but the fact is that when they passed the stimulus package, they said unemployment would be a maximum of 8 percent. It’s now 9.6 percent. Enough said.”

Every single Republican will follow him down this path. And a non-trivial number of Democrats, worried about their chances in November, will join them. So the reaction to a payroll tax holiday or some other package of business tax cuts will be “that’s fine, and also we need to make the tax cuts permanent so we don’t reverse the benefit to our small businesses.” Heck, even Chris Van Hollen seemed to give ground on this, trying to set up a new firewall between a one-year extension of the Bush tax cuts and the “permanent” extension sought by Republicans. And of course, this is completely out of whack with the Dems on the campaign trail babbling about fiscal austerity.

The DCCC may try to push back on this by asking Republicans to identify the $700 billion to offset the extension of the Bush tax cuts for the wealthy. But as long as Suzanne Kosmas or whatever other Blue Dog lines up with the GOP, it’s just not going to work. The lack of unity presents real problems.  (cont’d.)

On the campaign trail, many Democrats are going their own ways as they face the prospect that persistently high unemployment could cost them control of the House and perhaps the Senate. Many are embracing the stimulus package enacted soon after Mr. Obama took office; others run away from it. Some distance themselves from Mr. Obama and his economic team; most blame Republicans.

Democrats’ campaign message mostly is a Babel of individual voices. With the national winds blowing ever stronger against the party in power, threatened Democrats are tailoring their message to their particular district or state — with party leaders’ encouragement.

I’m not even convinced this is the smartest politics, though it may work in certain places. But it leads to terrible policy. We have a tragically large shortfall in aggregate demand. Private investment is slack and trade is negative. Government is the spender of last resort. But instead of devising a policy that would acknowledge such a reality, one big enough to actually fill the demand shortfall, the Administration is tied up in knots trying to create the perfect bank shot of a policy. But it’s all premised on the idea that such a bank-shot policy exists, one which would help the economy and pass muster with Republicans. It doesn’t. McCain’s statement proves it. They’ll ask for more tax cuts on top of the tax cuts.

It’s all well and good that the White House considers “stimulus” a dirty word among the public, and that they want to come up with some concoction that will get the needed votes. But with Republicans unlikely to agree with that, it’s both policy and political malpractice to come up with something so limp. Krugman calls it Rahmism:

Look: early on the administration had a political theory: it would win bipartisan legislative victories, and each success would make Republicans who voted no feel left out, so that they would vote for the next initiative, and so on. (By the way, read that article and weep: “The massive resistance Republicans posed to Clinton in 1993 is impossible to imagine today.” They really believed that.)

This theory led to a strategy of playing it safe: never put forward proposals that might fail to pass, avoid highlighting the philosophical differences between the parties. There was never an appreciation of the risks of having policies too weak to do the job.

By Wednesday this will become less about speculation and more about specifics. But we know enough by now. The White House is constructing the perfect mid-point, presumably achievable plan; the Republicans will just continue to say know and ask for more, sensing weakness; and rank and file Democrats will saunter off in all directions.

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David Dayen

David Dayen