Liberal House Democrats and their outside allies are railing at President Obama for his tax deal with Congressional Republicans. This anger is misdirected. Let’s examine the President’s three basic bad options for a post-election negotiating strategy, and a fourth option that would have allowed the Left to win on taxes.

Option 1 – Cut a deal with Republicans in 2010

The key element of this strategy is “in 2010.” Negotiations occur with the outgoing Congress and while Rep. Pelosi is still Speaker.

For the President this strategy did not risk the harmful policy effects of tax increases on January 1 or the political blame that would accompany them. It clears the decks of the 2010 agenda, allowing a fresh start in the State of the Union address. Rep. Pelosi is still be Speaker during the negotiations, providing a small tactical advantage.

At the same time, by setting a deadline and explicitly avoiding a veto fight, the President gave up negotiating leverage.

Shortly after Election Day the President chose this option when he said he intended to resolve this issue in 2010. At that moment my hopes for a good outcome spiked upward.

Option 2 – Wait until 2011. Veto the Republican bill and sustain the veto. Then negotiate a deal with Republicans.

Since Democrats would still have the Senate majority, this strategy would have required Leader Reid to allow some Democratic members to vote for such a bill and to get his liberals not to filibuster it. The President would say something like, “It’s clear Republicans aren’t going to negotiate until I have proven that I will veto their bill, so let’s get that behind us.”

At least initially this strategy would have energized the Left. The veto might create more Presidential strength in subsequent negotiations with Republicans, possibly leading to a better policy outcome for Democrats. Each side would have demonstrated it can block the other’s first choice outcome (Rs through a filibuster, Ds through sustaining a veto).

But tax rates would increase on January 1, hurting workers and their families, slowing economic growth, and initiating full-fledged blame game. January 2011 would be dominated by a 2010 tax fight with an unclear outcome, rather than by the New Obama Agenda, whatever that may be.

I think the President rejected this option because he correctly calculated that Republicans would be procedurally and politically stronger in 2011. Speaker Boehner and House Republicans could pass their preferred bill and send it to the Senate, increasing their leverage in negotiations.

A weaker hand in negotiations and the policy and political damage of January 1 tax increases made this option unpalatable to the President. He said this in his bizarre press conference on Tuesday, and his aides say it in almost every press story.

Option 3 – Let taxes increase on January 1 and blame Republicans. Sit tight and wait until Republicans cave to the political pressure created on both parties by higher taxes.

This option would have been a gamble that Republicans would cave to the economic policy damage and political pressure resulting from tax increases on January 1. Both sides of the negotiation would be accepting short-term policy and political pain for potential long-term policy benefit.

A liberal House member from a safe district might calculate that this tradeoff is worth it. The President faces different incentives. He is held responsible for the national economic situation, and he would take the brunt of the blame for short-term damage caused by a stalemate.

In addition, I think Congressional Republicans convinced the President they were more willing to sit tight than he was.

Option 4 – In early 2010, pass a budget resolution conference report that creates a reconciliation bill for the President’s preferred tax policy.

Congressional Democrats had this fourth option back in the Spring of 2010. This is the partisan path that would have eliminated Republicans’ ability to block the Democrats’ preferred policy. With a simple majority of the House and Senate, Democrats could have had a complete policy win.

The budget resolution is a concurrent resolution that is not signed by the President. The failure to pass a budget resolution and create a reconciliation bill is entirely a failure of the Legislative Branch.

Even better for the Left, the budget resolution (had there been one) could have provided protected reconciliation status only for tax changes of a certain deficit size. Congressional Democratic Leaders could have precluded the additional $700 B deficit effect of the Republicans’ preferred alternative. Thus the Democratic-preferred alternative would have needed only 51 votes in the Senate, while the Republican-preferred policy would have needed 60. That’s the margin of victory.

Unlike with health care, this would have been a straight-up-the-middle use of the reconciliation process. Republican procedural complaints would have been much less effective than during health care.

There are few downsides to this option, other than the routine annual challenge of making other hard budgetary decisions needed to pass a budget resolution.

Astonishingly, this year Congressional Democrats didn’t even try to pass a budget resolution. At the time I criticized them for irresponsibility and a failure to govern. Now we see a policy ramification of this failure.

When earlier this year I asked Republican friends still on the Hill why they thought Congressional Democratic leaders didn’t choose this path, most shrugged. I would have bet heavily in their favor had they taken this route. I am happy they made this mistake, and I’m mentioning it only now, when it’s too late for them to execute it.

Assigning responsibility for the outcome

One can debate whether the President should have pursued options 2 or 3 instead of 1, but option 4 trumps all of them. The President is responsible for the strategic mistake of elevating a center-right issue to the top of the agenda in an election year, but he bears only secondary responsibility for the legislative outcome.

Speaker Pelosi, Majority Leader Reid, and their Budget and Tax Committee Chairmen are responsible for missing the opportunity last spring to choose the reconciliation path in option 4. Had they done so, the Left would have won on taxes.

(photo credit: Wikipedia – Pelosi Reid)