December 9, 2010--Obama's Plan C

Yesterday I ranted on about how, without much of a fight, Barack Obama capitulated to the Republicans on the tax deal that they struck, a deal that is of disproportionate advantage to the wealthy.

The part about how much the rich will benefit if Congress approves is still true--more than a quarter of the tax cuts and breaks will go to about 5 percent of the population--but it may be, may be that the overall shape of the agreement is just what the economy right now needs.

Here's the case for that view--

When he took office in early 2009 Obama inherited a collapsed economy and through Plan A, in true Keynesian fashion, he cobbled together a nearly one trillion dollar stimulus program that was designed to pump money into the economy and save or create jobs. It was far from what he wanted but he needed one or two votes in the Senate from Republicans in order to get to 60 and so he compromised.

The idea was that if consumers aren't spending, if corporations aren't spending, it is only the government that can and this is necessary to prime the pump of investment and growth.

Many economists, very much including Paul Krugman in a string of New York Times columns, contended that it was not bold or large enough to pull the economy out of the muck.

Eight or nine months after Congress passed the package, things were looking promising. Though too many were still unemployed, technically the recession was declared to be over and for three months in a row there was positive news on the job-creation front.

But that promising news evaporated quickly as employers continued to lay off workers faster than hire them and all the data again turned south.

What to do?

It was time for Plan B--a second stimulus.

This proved to be politically unfeasible. The Democrats majority had shrunk by one--Scott Brown had been elected to replace Ted Kennedy--and by then the Republican propaganda machine had successfully slandered Obama, labeling him a socialist. And the country was in no mood for more spending. The GOP, again, who themselves had been the biggest spenders and deficit-builders in U.S. history somehow had managed to convince a gullible and fearful public that Obama was about to bankrupt the country through even more unpaid-for spending.

Obama, then, had three choices--ride things out and hope for the best, lapse into an early case of irrelevant lame-duckeness, or come up with Plan C for the economy.

Perhaps it is the latter that we are now witnessing.

Even people who hate him have to concede that Obama is smart and clever and so what I am suggesting may in fact be true.

Here’s how Plan C may be unfolding—

In order to get any economic legislation passed in the Senate Obama knew it had to focus exclusively on taxes. Even before January, when there will be about half a dozen additional Republican senators, there is no way now to do anything else.

After brokering the deal with the GOP, Obama the other day said that what he wanted to do for the middle class and unemployed was being held “hostage” by Republicans who were insisting that all parts of the Bush tax cuts had to be extended, not just those for 95 percent of the population who, Obama, claimed, and many of us feel, are the ones who need to retain more of their earnings.

So Obama decided that since a traditional form of stimulus was not possible he would create one out of tax policy.

And in order to get what he wanted for working people, the ones still suffering from the stalled economy, he would give in to extending the cuts for the rich (about a quarter of the total cost of the package) in order to get more than $700 billion of new money for everyone else. Knowing that the $700 billion would be simulative since the middle class and unemployed beneficiaries will spend it on real things—food, energy, clothing, cars, and of course rent and mortgage payments. All of which help create jobs and enable millions to keep up payments on their houses.

Ironically, Obama may turn out to be the hostage-taker, holding Republicans’ obsession with tax cuts for the rich hostage in order to get the $700 billion he wanted into the hands of the middle class, the working poor, and the unemployed. Citizens the GOP do not care about.

If this works it will in retrospect turn out to be brilliant. A great example of shifting strategy as circumstances change.

If it doesn’t, Obama is cooked since the Republicans will walk away from any shared responsibility, claiming that the only part of the plan that worked, and without socialist Obama in the White House would have been the heart of the plan, was the part that devoted to getting more money to the “job creators”—to their real constituency: the wealthiest 5 percent.

As it always does, time will tell