Christmas in October, 400 Pages and Growing

Just because it’s utterly predictable doesn’t make the race to festoon the Christmas tree bailout bill with ornaments any less frustrating:

The Senate hopes to revive Treasury’s $700 billion financial rescue plan Wednesday night by packaging it together with more than $100 billion in popular tax breaks as well as aid to rural schools important to House Republicans. To calm voters fearful of bank failures, the $100,000 cap on federal insurance for deposits would also be raised to $250,000ââ?¬â??a concession backed by both parties but also aimed at community banks who can be helpful in building small town support for the larger bill. With each permutation, the bill has steadily grown in size. Treasury’s initial plan was about three pages long. The House version, which failed, stretched to 110. The Senate substitute now runs over 450 pages. And tucked away in the tax provisions is a landmark health care provision demanding that insurance companies provide coverage for mental health treatmentââ?¬â??such as hospitalizationââ?¬â??on parity with physical illnesses. Really a bill onto itself, the mental health parity measure has been a bipartisan priority for top lawmakers in both chambers but has stalled because of disagreements again over how to pay for its estimated $3.8 billion five-year cost. In the current climate, that seems to be no longer a stumbling block, and if the Treasury plan becomes law, it will also.

Really now. Regardless of the merits or drawbacks of the parity measure, how exactly is it related to the financial meltdown at hand? Of course, it’s not, and it’s really just political gimmickry in this context. More here:

Senators loaded the economic rescue bill with tax breaks and other sweeteners for the right and left, hoping to secure approval in the House by Friday, just days after lawmakers there stunningly rejected an earlier version and sent markets plunging around the globe. [. . .] House GOP opposition appeared to be easing after the Senate added $100 billion in tax breaks for businesses and the middle class, plus a provision Republicans advocated to raise, from $100,000 to $250,000, the cap on federal deposit insurance. They were also cheering a decision Tuesday by the Securities and Exchange Commission to ease rules that force companies to devalue assets on their balance sheets to reflect the price they can get on the market. The heart of the bill, and the opposition to it, remained the same. It would enable the government to spend billions of dollars to buy bad mortgage-related securities and other devalued assets held by troubled financial institutions. If successful, advocates say, that would allow frozen credit to begin flowing again and keep the economy from a deep recession. [. . .] As revised by the Senate, the package would extend several tax breaks popular with businesses. It would keep the alternative minimum tax from hitting 20 million middle-income Americans, and provide $8 billion in tax relief for those hit by natural disasters in the Midwest, Texas and Louisiana. The bill would not point to offsetting spending cuts to pay for the AMT and disaster provisions, but it would have revenue offsets for part of the energy and extension measures. The failure to offset many of the tax cuts angered the House’s band of “Blue Dog” Democrats. The increase in the deposit insurance cap was a bid to reassure individuals and businesses with accounts in banks and similar institutions. The Senate specializes in high-stakes legislating-by-enticement, and the long list of sweeteners it added was designed to attract votes from various constituencies. Tax cuts new and old are favorites for most House Republicans, the main target of intense lobbying to gain support for the measure. Help for rural schools was aimed mainly at lawmakers in the West, while disaster aid was a top priority for lawmakers from across the Midwest and South. Another addition, to extend the deductibility of state and local taxes for people in states without income taxes, helps Florida and Texas, among others. And there were plenty of obscure tax breaks to go around, like one for certain wooden arrows used by children, and another benefiting litigants in the 1989 Exxon Valdez oil spill. Senate leaders were expected to try adding another goodie before the final vote: extending a tax break for homeowners who do not itemize their tax returns. Raising the federal deposit insurance limit – along with the SEC’s decision to ease accounting rules on valuing assets – helped House Republicans claim credit for some substantive changes. And with constituent feedback changing dramatically since Monday’s spectacular House defeat and the corresponding market plunge, lawmakers’ comfort level with the package increased markedly.

To be clear—I’m all for tax cuts that come in all shapes and forms (and I agree with ATR that these particular cuts shouldn’t be demagogued as “earmarks”). And tax policy is in the right ballpark, unlike the mental health parity provisions mentioned above. But if tax cuts are on the table, the missing big kahuna would be the capital gains tax, right? (I’m talking about pragmatically, not politically). Radio talk show host and recent ubiquitous newscast presence Dave Ramsey is certainly making that case in his “Common Sense Fix” proposal, which will go absolutely nowhere but is far more straightforward than any of the Congressional bills thus far, IMO. But we all know that anyone looking for the perfect policy response is going to be disappointed. Horse-trading like we’re seeing today is part and parcel of the legislative process used to buy votes and drive consensus (usually a code word for bad policy). It may be that the tax cuts were the House Rs’ consolation prize for losing out on their ultimate goal—placing the risks and burdens of financing the bailout on the private sector where it belongs, and not on taxpayers at large. And yes, Democrats seem to have accurately surmised that the cuts would make the bitter bailout pill marginally easier to swallow for the folks on the other side. Will this bill be an improvement on the bill that went down in the House on Monday? Probably. But overall, this bailout is inevitably going to be a dog’s breakfast no matter how you slice it. In his excellent piece on our sister site today, my colleague Mike Flynn really nailed the whole thing succinctly:

Congressional leaders have vowed to bring a new proposal for a vote, possibly as soon as Thursday, proving yet again that Washington is fertile ground for really bad ideas. But with the market reboundingââ?¬â??as of this writing the Dow was up almost 300 pointsââ?¬â??and public opposition hardening, signs are emerging that banks are starting to clean house. The crisis may have already peaked. Of course, Congress’ ability to further screw this up can’t be overstated.

‘Nuff said with that one—he nailed it. I would highly recommend reading his whole piece for an excellent primer on the roots of the current crisis.