Tsunami Thursday ends an era

John Wohlstetter Author, “Sleepwalking with the Bomb”
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Mark Thursday, Dec. 17, 2010, on your political calendar as the day twin cultures were defeated. The culture of spending, embraced by both parties, was repudiated decisively when Senate Majority Leader Harry Reid rose to pull the monster 1,924-page, 6,630-earmark omnibus spending bill. And the culture of class envy was repudiated with equal decisiveness when the House overwhelmingly passed the extension of the Bush tax cuts and defeated an amendment to raise the estate tax on large estates.

The culture of spending was driven by decades of habit coupled with a belief held by politicians that voters, despite polls showing dissatisfaction with spending, really want their government-provided goodies and thus will ignore mushrooming deficits and debt. The ultimate proof of its supposed intractability was the government shutdown confrontation between Republicans and President Clinton in 1995. The confrontation came one year after an election that swept the GOP into control of the House of Representatives for the first time in 40 years. The public reaction to the temporary shutdown was sharply negative. Voters blamed the GOP for it, as the “Washington Monument ploy” won out again: when spenders are pressured to cut, they deliberately cut muscle rather than fat so that voters scream and thus force rescinding of the cuts.

The received wisdom was that the omnibus spending bill would have to be swallowed to avoid a politically fatal government shutdown. The Senate’s blocking of the $1.2 trillion omnibus bill marked a stark change in the spending culture. Voters spoke decisively in 2010 — spurred by the financial meltdown, serial bailouts that appeared to reward many undeserving recipients and President Obama’s two-year “spendathon.”

But the House votes were momentous too. After years of blaming the Bush tax cuts for harming the economy by driving deficits up, 54 percent of Democrats voted against old-line hyper-liberal Speaker Nancy Pelosi. The argument about economic growth was won by the tax-cutters. Reducing deficits must be done via economic growth — spending restraint plus lower taxes to spur investment — and not by higher taxes to obviate the need for spending cuts.

Objecting GOP conservatives have a point, when they state that a two-year extension of existing tax rates will not strongly stimulate new investment. But the debacle of a huge tax hike has been averted. And the 2012 elections, fittingly, will now feature a debate on taxes in which the president, by signing this deal, has been disarmed. His “No tax cuts for the wealthy!” signature mantra is now as dead as the senior President Bush’s “Read my lips: no new taxes!” refrain was after he signed a 1990 tax-hike deal with Democratic leaders.

And the bad ship “Politics of Envy” has taken a multi-compartment hit below the waterline from a political iceberg. On the table was a 35-percent estate tax, which would prevent restoration of pre-2010’s confiscatory 55-percent rate. A zero “death tax” rate was never in the negotiating cards. But Nancy Pelosi lost 244-193 in her effort to push the estate tax rates higher than in the deal.

True, there is $313 billion of new spending in the deal President Obama cut with Republican leaders, some added in the Senate. But the Congressional Budget Office (CBO) estimates that the tax cuts will cost $858 billion (based upon dubious assumptions that tax-rate changes do not affect the size of the tax base, when often they do, though more so for permanent or long-term tax changes). Above all, deals are by definition compromises, and in this one the big wins went to the GOP. Ironically, by insisting upon a two-year limit to the tax cuts, much of the potential growth stimulus the president needs to help his re-election bid will be lost. Worse for his prospects: high unemployment will stretch out longer due to the extension of unemployment benefits.

The Tea Party, which provided much of the energy for the epic 63-House seat pickup by Republicans — the largest off-year election gain by either party since 1948, and the largest GOP pick-up since 1938 — provided the intensity to drive the push to finally break the spending frenzy. Some Tea Partiers see the deal as a sell-out. They should celebrate disasters avoided rather than lament triumphs deferred. The 2012 election result is not knowable, but it is likely that the election will be fought on Republican terrain.

John C. Wohlstetter is a senior fellow at the Discovery Institute, a trustee of the Hudson Institute, author of The Long War Ahead and the Short War Upon Us, and founder of the issues blog Letter From the CapitolSM.