How to explain the extent to which Barack Obama moved toward a Republican position on the Bush tax cuts he clearly detests, especially considering a major, major cave-in on estate taxes? It can’t be because he so wanted the extension of unemployment benefits that he gave in over and over again. Nor can it be because he was so desperate for the one-year lowering of the payroll tax. That one sounds good and will put money in people’s hands, but it seems likely that Obama fought for it as some kind of fairness offset for keeping the “tax cut for the rich.” We know from the experience of one-year tax cuts in 2008 and 2009 that, as Milton Friedman’s “permanent income hypothesis” foresaw, it will have very little stimulative effect on the economy.
Here’s a theory: Obama said, “What the hell.” Once he knew he had to give in, and would get criticized for giving in, he figured he might as well go whole hog. The whole deal seems designed to test conservative arguments about how best to help the economy right now, with the understanding that if the economy improves markedly as a result, he will get more credit for his role from the independents he lost so decisively in the 2010 election. And if it doesn’t, then the GOP will be in the position he was in this year in relation to the stimulus — their desired policy won’t have worked either, and he won’t get blamed for acceding to political reality in going along with it.
Paul Krugman and the Nation and Moveon.org were going to be enraged no matter what compromise he struck. So…what the hell. Go long. Try the Hail Mary. Nothing Barack Obama could have done indicates just how empty his own economic policy quiver is.