On the surface, the tax deal was shaped by the Republicans’ strong bargaining position: they could afford to play a game of chicken with the Bush tax cuts extension while Obama and the Democrats could not. Accordingly, the White House had no choice but to accept a deal that broke Obama’s campaign pledge to let the tax cuts for the highest bracket expire, a development that would have seemed improbable in 2008, and a political disaster for liberal Democrats.
The difference between Obama and the liberal wing of the Democratic Party, though, is that Obama is acutely aware that his biggest political problem is the state of the economy. There is no provocation of the left wing that could prove as politically damaging as 2010-level unemployment in 2012 would.
Accordingly, despite the carping of liberal economists, Obama administration believes that there is no better way to improve the economy than to accept a package deal that includes all the Bush tax cuts. Adam Serwer, helpfully, has explained why liberals have a hard time understanding the compromise:
The reason most liberals are disappointed about the deal isn’t simply because the government isn’t soaking the rich. It’s because, as Mike Konczal writes, tax cuts for the rich don’t significantly stimulate the economy, and because, as Dave Weigel notes, looking back at the president’s now meaningless pledges over the past few years, liberals wanted to use the money from the top-tier tax cuts for a progressive domestic agenda.
Here is the possible point of departure for the administration: perhaps tax cuts for the rich “don’t significantly stimulate the economy,” but at this point it’s becoming inescapably evident that neither do the kinds of “progressive domestic agenda” items that were included in the stimulus bill. Clearly the administration, for its part, has rethought the effectiveness of those measures. Take as an example the decision to replace the Making Work Pay tax cuts — heralded as the smartest of behavioral science and demand-side stimulus measures — with a payroll tax cut, an approach long favored by supply-siders. Why did Obama make this change in policy? Probably because the Making Work Pay rebates didn’t work as advertised.
If the administration thought there was a better use for the high earner’s money than letting them keep it, it would have found a way to change the bargain. But it’s been clear for a while that Obama’s team doesn’t have the necessary faith to pursue that course. Peter Orszag, after having just left Obama’s Office of Management and Budget, explained this thinking in a fairly straightforward manner in a September New York Times column:
In the face of [high unemployment and unsustainable budget deficits], the best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.
Note that Orszag isn’t talking about a compromise between left and right. He’s talking about a compromise between closing the deficit and increasing unemployment. In other words, the two-year extension of tax hikes isn’t simply a painful bargaining outcome for the administration. It’s actually the preferred policy.