Chapter Two
The Deal That Worked

THE MORNING AFTER THE MIDTERM ELECTIONS, OBAMA HELD A meeting with his senior staff. He had just been hit with a historic loss. “Everybody was prepared for the worst—and it got worse,” Robert Gibbs recalled. “We’d be playing defense for the next two years. People were very down and depressed.” Obama’s presidency was on the rocks.

As David Axelrod later put it, “Everyone was hanging crepe.”

Not Obama. This is not the time to gnash teeth, he told his aides, we have a lot of stuff to get done. The Democrats still controlled both houses of Congress through the end of the year.

He ticked off a list of what he aimed to achieve in the next two months: a tax deal, extending unemployment benefits, ratification of the New START treaty reducing nuclear arms, repeal of the Pentagon’s Don’t Ask/Don’t Tell policy preventing gays and lesbians from openly serving in the military, passage of the DREAM Act (which would grant citizenship to undocumented young adults who met certain requirements), and a children’s nutrition bill advocated by Michelle Obama.

“One of these alone was a heavy lift,” Axelrod said. “Together, it seemed a leap of faith. We all looked at each other quizzically. ‘What does he see that we don’t?’ ”

THAT DAY, THE PRESIDENT HELD A PRESS CONFERENCE. HE DID not come out swinging; he was defensive. He said he understood if some voters, in response to the stimulus and the bank and auto bailouts, “felt as if government was getting much more intrusive into people’s lives than they were accustomed to.”

He added, “I’m sympathetic to folks who looked at it and said this is looking like potential overreach.”

Despite having ridden to victory in 2008 on the theme of change, he had not been able to transform Washington, but he felt he had a good reason: “We were in such a hurry to get things done that we didn’t change how things got done.”

His spin on the election was that voters “want everybody to act responsibly in Washington” and “work harder to arrive at consensus.”

But was that why dozens of Tea Partiers had just been elected—to make politics in the capital more mature?

“I do believe there is hope for civility,” Obama remarked.

The same day, Mitch McConnell, minority leader in the Senate, adopted a combative tone: “Our primary legislative goals are to repeal and replace the health spending bill, to end the bailouts, cut spending and shrink the size and scope of government. The only way to do all these things is to put someone in the White House who won’t veto any of these things.”

He was signaling the essence of the Republicans’ hyperpartisan strategy: destroy Obama.

The president had conveyed a much different message: in the coming food fight, he would be the adult in the room, the reasonable man looking for productive discourse and sensible compromise.

Axelrod, according to another Obama adviser, believed the election results meant that independent voters wanted a leader who would make all the squabbling schoolchildren in Washington do their assignments. The president and his message man were betting that such an approach would both win back those in-the-middle voters (even if it frustrated progressive activists and congressional Democrats) and yield policy advances that would benefit the nation.

DURING THE FOLLOWING WEEKS, THE WHITE HOUSE STAFF WAS consumed with a postelection reorganization. White House people wondered—or worried—about who would be departing and who would be getting which jobs. The makeover was being overseen by Pete Rouse, the low-key interim chief of staff. A month before the election, Rahm Emanuel had left his post—abandoned it, grumbled some White House staffers—to run for mayor of Chicago. Obama had tapped Rouse, the methodical deputy chief of staff, to replace Emanuel, on a temporary basis.

Known for his analytical talents, Rouse was a fan of developing strategic plans. After the roller-coasterish first two years of the presidency, Obama could use some strategy. And Rouse had a lot to consider—as Obama and his advisers realized that plenty of missteps, large and small, had led to this low point.

There was no shortage of advice. Anita Dunn, the former communications director, and others believed the White House should boldly define Obama’s program and demonstrate he was willing to fight for it. Yet there was another school of thought within the president’s circle: Obama’s personal attributes mattered most. Independent voters perceived him as too partisan and too liberal—and that was the problem.

This discussion tracked back to internal deliberations held during the 2008 campaign. Should the campaign push Obama himself as the postpartisan change he championed, or did it have to create a mandate for the specific policy proposals Obama would press for once in the White House? Boiled down, the question was Obama the brand or Obama the program. There certainly was overlap. But after the midterm elections, Obama’s political aides were focused on repairing the brand.

OBAMA HELD PRIVATE DINNERS AND MEETINGS WITH WASHINGTON veterans and outsiders: Leon Panetta, a former Clinton chief of staff now heading the CIA; Kenneth Duberstein, a Reagan chief of staff; former Senator Tom Daschle; David Gergen, a centrist presidential-adviser-turned-pundit; Matthew Dowd, a onetime George W. Bush adviser; John Podesta, who headed Obama’s presidential transition and now ran the liberal Center for American Progress; Bill Clinton; and others.

Vernon Jordan, the preeminent Washington fixer, told Obama he had been overly partisan. Clinton administration veterans suggested that Obama be . . . well, more like Bill Clinton.

Some of these interlocutors reiterated the widespread gripe that the Obama White House was too insular. Obama was told he should get out more, strengthen his relationships with other Washington power players, be less aloof from the capital’s permanent establishment. He should put the bully pulpit to better use. He should have a more disciplined White House.

Rouse’s review was supposed to address the widespread criticism in Washington that the crew at 1600 Pennsylvania was indeed too locked within its own bubble. But the immediate impact of all this assessing of White House process was uncertain.

“Obama didn’t care about the criticism that he was too insular,” a White House aide said. “He didn’t give a shit.”

One outside adviser who met with Obama shortly after the election found that the president was surprised by the depth of the loss. What stung Obama was not the virulent animosity of the Tea Party set, but that he had lost the middle. He believed that one reason for this was that the business community had turned against him so sharply. If the antagonism of the corporate class was causing independent voters to view the president as out of touch with the private sector, the adviser told the president, this would somehow have to be addressed before the next election.

Obama acknowledged that, but he had a more visceral response: “I saved these guys when the economy was falling off a cliff. Now I get nothing but their venom.”

The president told another adviser that the elections caused him to conclude that he had to find a way to create jobs and not let anything hold up the recovery. Everything else depended on people believing and feeling that the economy was moving in the right direction. This was hardly a radical observation. Putting it into practice would be the challenge.

ON VETERANS DAY, A DOZEN OR SO PROGRESSIVE POLICY ADVOCATES filed into the Roosevelt Room of the White House for a confab with Obama’s top advisers. Larry Summers, Gene Sperling, David Axelrod, Phil Schiliro, and Jim Messina, the White House deputy chief of staff, were present. The visitors included Robert Greenstein, the president of the Center on Budget and Policy Priorities; Bill Samuel, the legislative director of the AFL-CIO; and John Podesta. The subject at hand was the issue that the politerati expected to define this lame-duck session: the Bush tax cuts.

The advocates were nervous about what Obama might do. The issue, they believed, was simple: fight or no fight? But Axelrod reminded them that Obama had promised to end the Bush tax breaks for the rich, but he had also vowed to prevent a tax hike for the middle class.

With the Republicans in the Senate blocking legislation that would extend only the middle-class tax cuts, Obama would have a difficult time honoring both promises. He might have to choose. Thus, the White House was considering the possibility of a deal, instead of a knockdown slugfest.

Summers was blunt: to extend soon-to-expire unemployment benefits, we’re going to have to give up on the tax cuts for the rich.

“Getting more for our people is more important than getting less for their people,” he said.

Summers explained that these benefits and all the tax cuts would run out at the end of the year and that would place a drag on the economy at precisely the wrong moment. He and the president didn’t want another negative jolt to the already anemic recovery. It was far more important to procure more stimulus for 2011 and 2012 than to bicker over the rich receiving unnecessary and deficit-causing tax cuts.

The advocates understood this logic. Still, several maintained that Obama ought to force the Republicans first to vote on the tax cuts, if only to show the world that the GOP was willing to kill middle-class tax breaks to serve the wealthy.

Obama, though, wasn’t spoiling for a fight—in part because he didn’t trust his comrades. McConnell, he believed, was willing to play a game of chicken and permit all the Bush tax cuts to end on December 31. Then the new House—under the control of Republicans—would quickly pass legislation to renew the tax cuts for rich and middle-income earners and perhaps even make them permanent. The pressure would mount on the Democratic-controlled Senate to do the same. White House officials believed Democrats in that body would eventually blink and agree to an across-the-board extension.

“We’re not going to win the battle,” Summers told the group, “so let’s focus on what we can gain in return.”

MANY HOUSE DEMOCRATS WERE PRESSING THE WHITE HOUSE to mount a battle royal. They had just experienced a brutal election. They knew that extending the tax cuts for the rich would create more debt and that would lead to greater pressure for more budget cuts. They at least wanted a public debate that would frame the discussion in their favor.

“We heard Democrats say, ‘Let’s make them vote over and over again on tax cuts for the rich,’ ” Axelrod later said. “ ‘Go until January or February and people will know that’s what the Republicans stand for.’ We were flabbergasted. They missed the overall point that taxes would go up and unemployment insurance would be lost by two million. Obama was determined to get something done.”

Especially when unemployment was near 10 percent.

Obama and his aides didn’t believe they would gain much politically from a dramatic face-off with the Republicans during the holiday season when it likely wouldn’t register much with the American public.

Another compelling reason for eschewing a grand confrontation was the time it would suck up. A drawn-out tussle over the tax cuts would leave Obama little opportunity to achieve the other parts of his lame-duck agenda: New START ratification, the repeal of Don’t Ask/Don’t Tell, and passage of the DREAM Act.

Obama saw the trade-off clearly. He could please those congressional Democrats and progressive allies craving fisticuffs and (at best) end up with some modest tax-cut compromise and nothing else—or he could quickly negotiate a more expansive deal and then have a shot at scoring a civil rights victory, securing a nuclear arms control treaty, and obtaining a victory for immigration reform.

Over the Thanksgiving holiday, the president discussed this in a long call with David Plouffe, the no-nonsense strategist who had managed the 2008 campaign.

“They will say you caved,” Plouffe told him. “That can’t be avoided.”

I know, Obama said. But that would be the price that had to be paid.

AT THE NOVEMBER 30 DAILY PRESS BRIEFING, ABC NEWS’S JAKE Tapper, noting that the president was scheduled to head to Hawaii for a holiday trip on December 18, asked Gibbs, “The president thinks that funding the government, passing unemployment insurance extensions, Don’t Ask/Don’t Tell repeal, the DREAM Act, tax cuts, and START all can be done in the next eighteen days?”

Gibbs had a one-word answer: “Yes.”

“Good luck,” Tapper replied, with a touch of sarcasm

“Well, thank you,” Gibbs said. “You’ll have a lot to cover.”

THAT DAY, OBAMA AND THE DEMOCRATIC AND REPUBLICAN leaders of the House and Senate launched bipartisan negotiations aimed at reaching a tax-cut deal. The first session of these “six-pack” talks, held in an ornate Senate conference room, had not gotten much beyond vague opening statements.

The media reports focused on whether this ongoing powwow would save the expiring Bush tax cuts—and which portions of those tax breaks would remain. Obama’s crafty intention to use this issue to advance stimulative policies was not widely known.

The following morning, Obama gathered his economic team and top advisers in the Oval Office—Biden, Geithner, Summers, Rouse, Klain, Messina, Jarrett, Schiliro, Lew, and others—to strategize how best to negotiate a tax-cut package fast.

Biden emphasized that if Obama challenged the Republicans on tax cuts, the Senate would bog down and the White House could lose New START. Ratifying the nuclear arms treaty was a top priority for Obama. If it flopped in the Senate, Obama would look weak on the world stage; his attempt to reset relations with Russia (a necessary component of his efforts to isolate Iran and inhibit its nuclear program) would be in tatters. Biden reported that Senate Republicans were telling him the tax-cut issue had to be settled before any other business could proceed.

“This is no bluff,” Biden said. And in the next Congress, he warned, ratification might be a total nonstarter.

Obama believed he could win approval of the treaty before the lame-duck session concluded. His questions concerned Don’t Ask/Don’t Tell.

“Do you really think I could get repeal, if we get the tax-cut deal?” he asked Messina and Schiliro.

They said they believed so, but quickly added there was no guarantee.

Obama told his aides he was prepared to take the heat on a tax-cut deal. He knew liberal Democrats on the Hill and progressives elsewhere would scream. But Obama felt it was worth the political trouble to end the ban on gays and lesbians openly serving in the military.

Let’s move quickly, the president told his team.

The six-pack negotiators held two rounds of meetings that day but made no real progress. The Republicans declared they would never agree to any package that decoupled the Bush high-end tax cuts from the others. But these were not the key negotiations.

Weeks earlier, Obama had handed Biden the top-priority assignment of getting the New START treaty ratified. The vice president had once chaired the Senate Foreign Relations Committee and for years toiled on nuclear arms control issues. No one in the White House had a clearer grasp of the Senate, its procedures, and its members.

Biden had immediately started talking with Mitch McConnell about the treaty. Now, with Obama’s approval, Biden expanded his chats with McConnell to cover the possible shape of a tax-cut deal.

The vice president was old school. He took pride in his decent working relationships with Republicans in the Senate, including McConnell. “Joe does the things that Obama doesn’t like to do,” a Biden friend remarked. “Like negotiating with the Hill. He loves it.”

As the six-pack talks dragged on, Biden and McConnell spoke privately several times. The basic parameters emerged: the Democrats would get an extension of unemployment benefits (which Republicans in the Senate had long opposed) and the GOP would pocket those top-bracket tax cuts. Both sides could claim credit for extending the tax-rate reductions for the middle class.

In his conversations with the vice president, McConnell had noted another thorny issue. If the White House wanted much else in the package, the Republicans would insist on deep cuts in the estate tax for the wealthy. In particular, they fancied a proposal being pushed by Republican Senator Jon Kyl and Democratic Senator Blanche Lincoln, which would raise the exemptions for the estate tax from $3.5 million for an individual and $7 million for a couple to, respectively, $5 million and $10 million and cut the rate on all estates larger than those from 55 percent to 35 percent.

This would be a tremendous boon for the wealthiest; about sixty-six hundred estates a year would each gain a break of $1.5 million—and $23 billion in tax revenues would be lost.

FOR WEEKS, OBAMA AND HIS ECONOMIC TEAM HAD BEEN HASHING out what they would press for in a deal. They hoped to bag extensions for the various tax cuts of the Recovery Act—many of which were designed to assist middle-income families or the working poor. They wanted thirteen months of unemployment benefits for out-of-work Americans. (About two million unemployed workers were about to run out of these benefits, and a White House report claimed that curbed household spending due to the termination of unemployment benefits could lead to the loss of six hundred thousand jobs.)

If Obama could get this, he would pump several hundred billions of dollars into the economy. It would be a second stimulus—without being labeled such.

Meanwhile, the House Democrats held a vote on their plan to extend the middle-class tax cuts and kill the upper-income tax cuts. The vote was decisive, 234 to 188 in favor. But this was irrelevant because the real action was taking place in Biden’s and McConnell’s offices. It was as if the House Democrats were living in a separate world.

AT 9:00 A.M. ON SATURDAY, DECEMBER 4, 2010, OBAMA AND HIS top advisers convened in the Oval Office for that decisive meeting. McConnell had tendered Biden a specific offer. If the president would accept a two-year extension of all the Bush tax cuts and the Lincoln-Kyl estate tax cut, the Republicans would agree to a long stretch of unemployment benefits and an extension of some of the tax cuts for middle- and lower-income Americans that Obama had included in the stimulus bill.

But, McConnell added, these breaks could not be refundable. Republicans tended to despise refundability, deriding it as welfare. (With a refundable tax credit, a taxpayer who qualifies for the credit but whose tax liability is less than the amount of the credit receives the difference as a refund.)

The GOP, McConnell added, would not support continuing renewable energy tax credits. That tax break was too Obama-ish.

Timothy Geithner spoke first. He was often one of the more prudent voices in Oval Office deliberations. But now he was vehement: this offer was not good enough.

Geithner advised Obama to stick to a simple proposition: if, as the Republicans say, it’s wrong to let taxes go up during slow economic times, this notion should apply across the board. The president should demand a continuation of all the key tax credits and breaks for middle- and low-income Americans, the renewable energy grants, and greater depreciation for business investment expenses.

Without more from McConnell, Geithner said, this was a lousy deal for Obama. The Treasury secretary was ready to walk. Others in the room were stunned.

The president was unhappy about the estate tax. He suggested pushing back on that. Geithner proposed that the White House insist on everything it wanted in return for accepting a version of the estate tax cut. And he had a particular demand in mind.

Geithner and Sperling had come up with the idea of dumping the Make Work Pay tax credit that had been in the stimulus package and instead pressing for a yearlong suspension of the payroll tax for employees that funds Social Security. For months, Sperling had been consumed with a payroll tax holiday to add kick to the flagging economy. He had compiled a list of Republicans who had supported it in the past. Though there had been concern that older voters might fret about cutting revenues earmarked for Social Security, the economic team agreed it should be a critical part of the deal. (The tax break would not affect Social Security payments.)

The refundable Make Work Pay credit, which provided $400 to individuals and $800 to joint filers, had been a centerpiece of Obama’s stimulus package. But most voters never realized they had received this tax cut, because it had been doled out in small increments over the course of the year via decreased withholding on paychecks. Only one out of ten people in a recent poll knew that Obama had cut taxes for most Americans. It had been yet another communications screwup.

In the Oval Office, Geithner and Sperling noted it would be better to win a new tax cut for middle- and low-income Americans than to continue an invisible one. Another sly reason for the swap was that a one-year payroll tax holiday would inject about $110 billion into the economy; an extension of the Make Work Pay tax credit would do the same, but over two years. The new proposal would produce twice the bang. Plus, Sperling figured, it might be possible in a year to win an extension of this break—would the Republicans really say no to that?—and shove yet another $110 billion of stimulus into the economy.

At this meeting, Phil Schiliro raised a concern about the particularly dicey matter of acquiescing on the estate tax provision. This would enrage Capitol Hill Democrats, he predicted. They despised estate tax breaks for the rich and had been scuffling with Republicans over this for years.

Yield on this, Schiliro told the president, and you’ll have a firestorm within your own party.

Others in the room disagreed. Total up what the rich people get, they said, total up what the poor people get, and as long as the poor do better, it will be fine.

No, no, no, Schiliro insisted. The numbers won’t matter.

Biden proposed telling McConnell that opposing the estate tax is an article of faith for most Democrats and that opposing refundability is the same for Republicans. Let’s trade one for the other.

Obama agreed—to a degree. He did consider the notion of handing the well-to-do another tax break offensive. He certainly couldn’t swallow the estate tax provision without refundability.

“Do we have to give so much on the estate tax?” he asked Biden.

Draw a line with McConnell, he instructed the vice president: “Tell them they’re not getting that unless I get refundability.”

To aides in the room, it seemed as if this could be a deal breaker.

THOUGH BIDEN DID NOT YET HAVE A DEAL WITH McCONNELL, Obama decided it was time to bring the Democratic congressional leaders into the conversation. It was a delicate moment.

The previous day, the Washington Post had reported that the White House had been talking privately to McConnell, outside the six-pack process. “The shadow talks,” the paper noted, “have stirred considerable ill will among Democrats, who complain privately that the White House is capitulating to Republicans without extracting anything substantial in return.”

The story was wrong in that regard, but it fueled the impression that Obama was preparing to fold on the tax cuts for the rich and sell out his party colleagues.

With intraparty apprehension in the air, Obama asked Harry Reid and Nancy Pelosi to come see him at the White House—that day. The two showed up in the afternoon.

In the Oval Office, with Biden and members of the economic team present, Obama described the current state of play to Pelosi and Reid: Joe and Mitch have been talking informally and in the course of these chats, Mitch gave Joe an informal offer, and we’re curious as to how Democrats in the House and Senate might react.

Reid, as one participant later recalled, “responded with a very polite fuck-you.”

It’s clear, he said to Obama, that you and the vice president have been negotiating directly with McConnell, and if you two think you can do business directly with him, feel free to bring whatever you cook up to the Senate floor and see how many votes you can get.

Reid didn’t express any anger. His message was more of a dismissive good-luck-it’s-not-my-problem.

Pelosi was more sympathetic. I understand why you did this, she said, but my caucus is shell-shocked from the elections and pissed off about . . . well, about everything.

She didn’t know how her colleagues would respond to this sort of compromise. She asked if she could bring other House Democratic leaders into the conversation.

Obama and Biden suggested that Pelosi and her allies meet with Biden that evening. When the conversation ended, Obama hugged the speaker, and then placed his hand on Reid’s back, as he escorted him out of the Oval Office.

THAT SATURDAY NIGHT, PELOSI ARRIVED AT THE VICE PRESIDENTIAL residence at the US Naval Observatory with Representative Steny Hoyer, the House majority leader, and Representative Chris Van Hollen, who had been participating in the six-pack talks.

Biden had ordered up a fine meal for the occasion. Timothy Geithner, Jack Lew, Pete Rouse, Ron Klain, and John Lawrence, Pelosi’s chief of staff, were at the table, too.

As they dined, Biden discussed details of the likely agreement. Pelosi appeared resigned to the compromise. She told Biden that if you say this is the best you can squeeze out of the Republicans, I believe you, but many of my members won’t.

Hoyer responded more positively; Van Hollen was irritated. The White House told us the six-pack talks were real, he protested, but you were negotiating on your own.

Then came dessert. As it was served, Biden revealed that the Republicans would also get the estate tax break. All three House Democrats were upset. Pelosi called this “crazy” and said that such a package would carry no Democratic votes. Hoyer also criticized this decision.

Van Hollen, as one participant later put it, “was on fire.” He was dead set against yielding on the estate tax. There was no economic rationale for such low rates on inheritances; they wouldn’t spur economic growth. It was just another giveaway to the rich—on top of the Bush tax-cut concession. This was going too far to strike a deal.

The three argued the matter with Biden, and then Geithner spoke up. Biden bristled a bit as Geithner took charge. The Treasury secretary told the House Democrats that he hated this provision as much as they did and perhaps more so than Biden. (The vice president didn’t appear to appreciate this quip.)

Geithner continued: I’ve been in these talks, and I can tell you that what we’re getting is worth it. You’ve been in the majority, and you haven’t been able to win extensions of refundable tax cuts for low-income Americans. We’re going to lose those tax cuts without a deal. It’s ghastly but it’s worth it.

The three saw there was not much use quarreling further. Hoyer insisted that a better deal be negotiated. Van Hollen remained upset about the Biden-McConnell negotiations. The White House, as he saw it, was not playing straight.

ON THE SUNDAY MORNING NEWS SHOWS THE NEXT DAY, McCONNELL and Kyl each hinted that a deal was close: extending all the Bush tax cuts in exchange for extending jobless benefits for millions of out-of-work Americans.

To pundits and the public, it seemed that the compromise was shaping up to be a GOP victory: the Republicans would preserve the Bush tax cuts for the rich and the Democrats would obtain unemployment benefits already supported by a majority in both the House and Senate (but blocked by a Republican filibuster). Republican hostage taking had paid off: they had forced Obama to bend on a defining campaign promise.

At noon that day, Obama and his top advisers gathered again in the Oval Office. McConnell had not provided Biden a firm counteroffer. But he had signaled that the Republicans would probably go for a payroll tax holiday. Refundability for the tax credits, though, would be tough. And no extension of the green tech tax credit.

McConnell had told the vice president he could not agree to any of this without Lincoln-Kyl.

Obama and his aides pondered all the trade-offs. Did they want to yield on Lincoln-Kyl? Or mount a fight and sacrifice those other benefits?

Sperling was sickened by the thought of including Lincoln-Kyl in the deal. But he calculated that a face-off over that would blow up the whole package, and, more important, he was guided by the numbers. He laid them out for the president and the others.

Lincoln-Kyl would provide about $20 billion to its beneficiaries. The tax credits the White House was pushing for would deliver between $50 and $70 billion in relief to middle- and low-income Americans.

“It worked out to at least a two-to-one trade-off between tax relief for our people and tax relief for dead rich people,” one participant said.

Obama was still not willing to accede to a big estate tax break without refundability. He gave Biden his marching orders: get everything we want, and, by the way, don’t give them everything they want.

Biden tried that. McConnell held firm: no refundability without Lincoln-Kyl. Come on, Biden said, isn’t there middle ground on the estate tax? After all, some Democrats were already supporting a less generous estate tax proposal. McConnell agreed to discuss this notion with his fellow Republicans. But he didn’t expect them to go for it.

That day, Pelosi called the White House: she wanted to bring a bigger group of Democratic leaders to see Obama to discuss the pending deal. White House officials persuaded Reid to bring his own leadership team. But White House aides decided to keep the groups separate as a way of preventing the opposition within their own party from reinforcing itself.

By that night—with Sperling and Jason Furman, the principal deputy director of the National Economic Council, negotiating details with GOP staff on the Hill—the White House had received word from McConnell that the Republicans would accept a payroll tax holiday and an extension of unemployment benefits in return for continuing all the Bush tax cuts for two years. But the Republican Senate leader still insisted on the Lincoln-Kyl estate tax provision.

THE NEXT MORNING, OBAMA, BEFORE DEPARTING FOR A SHORT trip to Winston-Salem to speak on education, met with Biden in the Oval Office.

The president said that accepting the estate tax provision on its own would be too much. The White House had to have more. Tell McConnell that the refundable tax credits were the price.

Obama was committed to wringing every last drop of stimulus he could out of the Republicans.

ON MONDAY AFTERNOON, PELOSI ARRIVED AT THE WHITE House with Democratic Representatives George Miller, Rosa DeLauro, John Larson, Xavier Becerra, Chris Van Hollen, and Steny Hoyer. They believed that not much had changed in the past two days, and the White House was merely informing them what items were currently on the negotiating table. They were not told how close the White House and McConnell were to a final handshake.

The meeting started in the Roosevelt Room without the president; the vice president walked the legislators through the various elements: payroll tax holiday, education tax credits, a child tax credit, refundability. He added that to get refundability, the White House had to concede on the estate tax.

Several of the Democrats recoiled. “We were very clear that the estate tax could be the straw that breaks the camel’s back, and we would not support the package,” one of the Democrats subsequently said.

While this was going on, Obama was in the Oval Office with his senior aides. When Phil Schiliro came in, the president asked for a report on the meeting.

“It’s brutal,” Schiliro said. “They’re all worked up.”

Obama left his office and walked the few steps to the Roosevelt Room. He sat down at the table. Obama gave no sign a deal was imminent.

The conversation got heated. Several lawmakers pointed out that this sort of compromise would violate Obama’s campaign promise to kill the Bush tax cuts for the rich. Obama noted that he had also promised not to raise taxes on the middle class. A few urged Obama to lead a last-minute crusade against the Republicans for siding with the rich.

“They didn’t realize that we were way beyond that point,” a participant later recalled.

Can you take me step-by-step through your strategy? Obama asked the lawmakers who were advocating a different course. All tax bills, he reminded them, had to start in the House of Representatives, which in weeks would be in the hands of Boehner and the Republicans. So, he wondered aloud, how could legislation next year end up being any better than the package at hand?

“It was really clear they did not have a strategy,” a senior administration official later said.

As Obama saw it, what these Democrats were requesting—three weeks of rhetorical debate during the holiday season—wouldn’t change American politics. Worse, it would prevent any action on Don’t Ask/Don’t Tell, New START, and the DREAM Act.

As this meeting was under way, Democratic senators arrived at the White House for a similar session. They were escorted to the Cabinet Room, across the hall from the Roosevelt Room. For a while, Obama and Biden were going back and forth between the two meetings. The conversation with Reid and his colleagues was less stormy. Reid was no longer as ticked off. White House aides thought he seemed resigned.

While these meetings continued, Biden left to take a call from McConnell, who told the vice president they had a deal. Biden called the president out of one of the meetings and gave him the news and then returned to the Roosevelt Room. He didn’t tell the House Democrats about the call. When the lawmakers left, most thought there would be more discussions.

Van Hollen was in a car heading back to Capitol Hill when he received an e-mail: the media were reporting that the White House and the Republicans had reached a compromise, and the Lincoln-Kyl estate tax cut was in it. Van Hollen called Pelosi.

“You’re not going to believe this,” he said.

Obama wasted no time. He shortly headed to the White House briefing room and announced that a deal had been hammered out.

THE PRESIDENT INSISTED THAT HE PREFERRED ONLY TO EXTEND tax cuts for the middle class, but told the reporters it would be “a grave injustice” and “a serious blow to our economic recovery” to allow tax rates to increase for these citizens. Republicans, he noted, were willing to block tax cuts for the middle class unless the rich were taken care of, but he could not let taxes be raised on the middle class—nor was he willing to permit two million out-of-work Americans to go without unemployment benefits.

Striving to position himself as a pragmatic leader, Obama equated Democratic partisans with Republican partisans, pointing out that “some people in my own party and in the other party . . . would rather prolong this battle.” The message: I’m different from the rest of Washington, and I’m trying to make this town of political squabbling function.

He announced all the concessions he had forced out of the Republicans, but vowed to continue opposing the “tax cuts for the wealthiest Americans and the wealthiest estates.”

His final point was a jab at those who had counseled battle: “These are not abstract fights.” Millions of Americans facing tough times would lose unemployment insurance or see their taxes go up absent a deal. This package, he maintained, would fuel economic growth and job creation. He did not use the word stimulus.

OBAMA HAD ARGUABLY WON THE IMMEDIATE POLICY BATTLE with the Republicans. For yielding on the tax cuts for the rich, he had gained $238 billion in stimulus: $112 billion for the payroll tax holiday; $56 billion in unemployment insurance; $22 billion in equipment expensing; and $48 billion in refundable tax credits for child care, the earned income tax credit, renewable energy grants, and the education tax credit.

The Republicans had pocketed $91 billion in the top-bracket tax cuts and $23 billion for the estate tax measure.

This math was on Obama’s side. But could the president now win the political and messaging war?

Minutes after Obama gave his statement, Gene Sperling, Jason Furman, and Dan Pfeiffer, the White House communications director, were on a conference call with reporters. They called this “an excellent deal” that included provisions that only a few weeks ago no one thought Obama could move past Republican opposition.

The Democratic-controlled House had recently failed to pass a bill to extend unemployment benefits for three months. Obama, they said, got thirteen months. The payroll tax holiday would mean $800 in relief for a worker earning $40,000. More than ten million low-income families, among them eighteen million children, would continue to receive a refundable child tax credit. Millions of students would receive the education tax credit included in the Recovery Act for another two years.

Yet the initial media coverage emphasized the extension of the Bush tax cuts—not Obama’s maneuvers to obtain progressive policies benefiting tens of millions of Americans. The New York Times reported that the deal marked “a retreat from [Obama’s] own positions and the principles of many liberals.” Retreat—the Times had called it a retreat.

CONGRESSIONAL DEMOCRATS HOWLED ABOUT THE DEAL. PELOSI sent out a tweet that seemed to signal opposition: “GOP provisions in tax proposal help only wealthiest 3%, don’t create jobs & add tens of billions to deficit.”

Progressive activists accused Obama of betrayal. Bending on the Bush tax cuts for the rich and conceding on the estate tax was what mattered for them, not the other side of the deal. Nor did they realize that Obama was trying to clear the path for a wider agenda: Don’t Ask/Don’t Tell, New START, and more.

Other progressive policy wonks did spot the value in the deal. Robert Greenstein issued a statement noting that “the White House achieved everything it sought for low- and middle-income families.” The Center for American Progress pointed out that the compromise would save or create 2.2 million jobs. Yet the positive reviews of these policy mavens did little to ameliorate Democratic anger.

THE MORNING AFTER THE DEAL WAS UNVEILED, OBAMA MET AT the White House with several of the nation’s leading progressive economists: Joseph Stiglitz, Alan Blinder, Paul Krugman, Robert Reich, Lawrence Mishel, and Jeffrey Sachs.

Obama wasn’t expecting a hero’s welcome from this crowd. Krugman, a high-profile columnist for the New York Times and Nobel Prize–winning economist, had recently excoriated him for even considering a compromise with the Republican “blackmailers.” Krugman feared that any continuation of the Bush tax cuts for the rich would lead to a permanent extension—which would blow a $700 billion hole in the federal government’s budget and push aside necessary investments.

Reich had recently written an article that slammed Obama for bolstering the Republican story of the economy (“big government, bureaucrats, and the cultural and intellectual elites” were responsible for the lousy economy) by setting up a deficit commission and freezing federal pay and discretionary spending. Obama, he complained, had failed to advance the competing plot line: Wall Street had brought the economy to its knees, and government action was necessary to undo the damage.

When Obama entered the room, he jokingly greeted the economists: “The last Keynesians in America.”

Obama tried to assuage the economists about the tax-cut deal. Krugman was his “grumpy self,” one participant said. The economists noted that the concentration of wealth and income at the top was a critical problem, and Obama acknowledged this.

But when Reich maintained that Obama was contributing to the GOP narrative by fixating on the deficit rather than jobs and by failing to blame the current economic woes on Wall Street malfeasance and overly pro-corporate policies, Obama disagreed. The American public, he said, was not ready to hear that, for it had been fed the government-is-too-big story for so long and people wouldn’t listen to other arguments. Several of the economists noted that if Obama did not promote the counternarrative, the GOP message would dominate.

The meeting didn’t change anything. “Given how he shook our hands at the end,” one of the economists recalled, “it seemed he didn’t want to see anyone in that room again.”

In his next column, Krugman reported that he remained “deeply uneasy” about the deal. He accused Obama of having empowered hostage takers.

The day after the meeting, Reich wrote: “Apart from its extraordinary cost and regressive tilt, the tax deal negotiated between the President and the Republicans has another fatal flaw. It confirms the Republican worldview.”

Reich was making an important point: Obama still didn’t have a compelling economic tale to tell. His opponents, though, had a coherent take: government spending was out of control and harming the economy.

This was a misguided view. Government spending had not triggered the economic crash of 2008. Wall Streeters selling complex securities attached to lousy subprime mortgages had spurred a financial crisis that precipitated an economic collapse that had cost eight million people their jobs. Moreover, with the economy barely growing, many economists believed it was the wrong time to diminish demand by slashing government spending. But the Republican bumper sticker—government is the problem, not the answer—was simple and resonated with voters upset about the economy.

Obama was not countering that basic talking point. He didn’t offer Americans a target for their fury or unease about the economy (while the GOPers did: the government). He didn’t provide a conceptual road map for improving the economy in the short term (while the GOPers did: downsize government). His pitch for the tax-cut deal was that it would assist financially stressed American families—a noble cause.

But he couldn’t describe it as a second stimulus because he had been outplayed by the Republicans on the first stimulus. Obama was doing what he could for the economy—using government action to gin up economic demand—but he wasn’t fully explaining what he was achieving.

SOON AFTER THE UNSATISFYING SESSION WITH THE ECONOMISTS, Obama held a press conference to discuss the deal. In an opening statement, he hit what was for him the basic point: he had sidestepped a “protracted political fight” to help middle-class Americans.

And he had. But with the first question, Ben Feller of the Associated Press challenged the president’s ability to stand on principle: “You’ve been telling the American people all along that you oppose extending the tax cuts for the wealthier Americans. . . . So what I’m wondering is when you take a stand like you had, why should the American people believe that you’re going to stick with it? Why should the American people believe that you’re not going to flip-flop?”

This question reflected the dominant analysis: Obama had broken a prominent campaign vow for the sake of political expediency—not that he had sacrificed a stand to assist millions of Americans.

“Hold on a second, Ben,” Obama shot back. “This isn’t the politics of the moment. This has to do with what can we get done right now.”

He said the Republican senators were not budging, and he had no choice; otherwise, the average American family would have to pay $3,000 more in taxes and two million Americans would be without unemployment insurance: “If there was not collateral damage, if this was just a matter of my politics or being able to persuade the American people to my side, then I would just stick to my guns.”

Moments later Chuck Todd of NBC News asked whether Obama was telegraphing his negotiating strategy for coming fights with the Republicans: “They can just stick to their guns, stay united, be unwilling to budge . . . and force you to capitulate?”

In the media world, Obama had capitulated.

Obama didn’t challenge Todd’s use of that word. Instead he explained: “This is a very unique circumstance. This is a situation in which tens of millions of people would be directly damaged and immediately damaged, and at a time when the economy is just about to recover. . . . My point is I don’t make judgments based on what the conventional wisdom is at any given time. I make my judgments based on what I think is right for the country and for the American people right now.”

Axelrod was sitting in the briefing room as Obama explained this point. The strategist was, as was often the case, staring at his BlackBerry and reading messages. But as he heard Obama say these words, he looked up and said to himself, This is a West Wing moment.

He and other White House aides were proud of Obama for placing policy and concern for struggling citizens ahead of politics and partisan demands.

In the final question, Jonathan Weisman of the Wall Street Journal noted that some on the left were questioning the deal and wondering if Obama possessed core values. What are you willing to “go to the mat on”? he asked.

Obama pledged he would fight the Republicans over making the Bush cuts for the rich permanent. He called that “a line in the sand.” Obama then provided a version of his governing philosophy, presenting it as a counter to his critics on the left:

This notion that somehow we are willing to compromise too much reminds me of the debate that we had during health care. This is the public option debate all over again. So I pass a signature piece of legislation where we finally get health care for all Americans, something that Democrats had been fighting for for a hundred years, but because there was a provision in there that they didn’t get that would have affected maybe a couple of million people, even though we got health insurance for 30 million people and the potential for lower premiums for 100 million people, that somehow that was a sign of weakness and compromise.

Now, if that’s the standard by which we are measuring success or core principles, then let’s face it, we will never get anything done. People will have the satisfaction of having a purist position and no victories for the American people. . . . In the meantime, the American people are still seeing themselves not able to get health insurance because of preexisting conditions or not being able to pay their bills because their unemployment insurance ran out.

Obama was riled up—the public option controversy still stung—and he continued defending compromise as a necessary means of reaching long-term progressive goals:

This is a big, diverse country. Not everybody agrees with us. I know that shocks people. The New York Times editorial page does not permeate across all of America. Neither does the Wall Street Journal editorial page. . . . [P]eople have a lot of complicated positions, it means that in order to get stuff done, we’re going to compromise. This is why FDR, when he started Social Security, it only affected widows and orphans. You did not qualify. And yet now it is something that really helps a lot of people. When Medicare was started, it was a small program. It grew. Under the criteria that you just set out, each of those were betrayals of some abstract ideal. This country was founded on compromise. I couldn’t go through the front door at this country’s founding. And if we were really thinking about ideal positions, we wouldn’t have a union.

So my job is to make sure that we have a North Star out there. What is helping the American people live out their lives? What is giving them more opportunity? What is growing the economy? What is making us more competitive? And at any given juncture, there are going to be times where my preferred option, what I am absolutely positive is right, I can’t get done. And so then my question is, does it make sense for me to tack a little bit this way or tack a little bit that way, because I’m keeping my eye on the long term and the long fight—not my day-to-day news cycle?

Obama was on a roll. He was not just defending the tax-cut deal. He was defending his entire presidency—not from the barbs of his rabid Obama-is-a-secret-Muslim-socialist foes on the right, but from the criticism of his purported allies on the left: “To my Democratic friends, what I’d suggest is, let’s make sure that we understand this is a long game.”

It looked as if Obama was more upset with the Left for not applauding this deal than he was with inflexible, filibustering Republicans for causing the dilemma. Obama believed he deserved more credit for this hard-fought compromise and for his previous accomplishments—and he wanted more backing from the Left for the tough decisions he’d have to make in the coming years while dealing with the recalcitrant GOPers.

Obama was right on this: the tax-cut deal had become a defining moment for his presidency.

OBAMA’S PRESS CONFERENCE PLEA FOR UNDERSTANDING AND backing did not persuade irate Democrats. At a meeting of the House Democratic caucus, Vice President Biden defended the deal and encountered angry tirades. Look, guys, Biden said, we did the best we could—and this would help the unemployed and the entire economy. (Noted forecaster Mark Zandi, who had advised McCain during the 2008 campaign, was predicting the provisions Obama had inserted into the package would increase economic growth in the coming years by 1.25 percentage points and create more than 1.5 million jobs.) But Biden didn’t win over the caucus. “Not everyone is a pragmatist,” a House Democratic leadership aide later explained. “Some people believe in rhetoric and the positive aspect of waging a good fight.”

AXELROD AND SUMMERS JOINED GIBBS FOR THE DAILY PRESS briefing on December 8. Summers handled the economics. With the deal, he said, there would be economic growth; without, there would be the risk of a “double-dip” recession. This was a big chip to put on the table. But Summers had long believed that if taxes went up for middle-class families, the economy could receive a dramatic shock.

Summers was more circumspect on another matter. Is this “fiscal stimulus”? a reporter asked him. “Yes,” Summers said, “it is putting money in people’s pockets.”

“So,” the journalist followed up, “this is a second stimulus?”

Summers pulled back: “No, I don’t think that’s the right way to think about it at all.”

“So this fiscal stimulus is a nonstimulus package?”

“I’m not going to play semantic games for you,” Summers replied. “These are fiscal measures that promote growth.”

The White House still couldn’t call the policy what it was.

THE WHITE HOUSE HAD LITTLE PATIENCE FOR THE LEFT-OF-center nay-saying—seeing it as another sign that progressive activists and intellectuals were out of touch with reality and not truly representative of the base they claimed to speak for. This deal would help millions. Nothing close to it had been in play on Capitol Hill. And polling showed that the agreement played well with Obama supporters and liberals, as well as independents.

Toward the end of the week, conservative commentator Charles Krauthammer published a column declaring that “Obama won the great tax-cut showdown of 2010—and House Democrats don’t have a clue that he did.” Krauthammer had seen through Obama’s ploy: “If Obama had asked for a second stimulus directly, he would have been laughed out of town.” Krauthammer was hardly pleased by this. He called the Obama-engineered compromise the “swindle of the year.”

When Obama read the Krauthammer column, he was amused and also exasperated. He now found himself more in agreement with the conservative columnist than with the liberal columnist Frank Rich, who days earlier had derided Obama for becoming a victim of the Stockholm syndrome and for surrendering “his once-considerable abilities to act, decide, or think.” Krauthammer got it, Obama thought, and Rich did not.

The tax-cut package passed without much trouble in the House and Senate (with close to half of the House Democrats rejecting it). When Obama signed the bill into law, both Pelosi and Reid skipped the signing ceremony. But McConnell was there.

That same day, Obama met at the White House with the top leaders of the labor movement. The unions had opposed the tax-cut deal. The unionists were also displeased with the South Korea trade accord Obama had recently signed and the administration’s decision not to push for the Employee Free Choice Act, which would make it easier for unions to organize workplaces. Richard Trumka, the president of the AFL-CIO, complained, “We don’t get real input” in White House decisions. He criticized Obama’s recent decision to freeze pay for federal employees, noting that would prompt private sector employers to do the same. He suggested the White House was not doing enough to beat back the joint GOP–Chamber of Commerce attack on labor unions and collective bargaining across the country.

Obama defended the tax-cut deal as the only stimulus he could push through Congress and remarked that he was operating in a hostile political environment: “It used to be that you could govern by peeling off a couple of Republicans to do the right thing. Now Palin and Beck are the center of the Republican Party—and there is no possibility of cooperation.”

Other union leaders vented their own frustrations. “You’re too nice,” Joe Hansen, the president of the United Food and Commercial Workers International Union, said to the president.

“Business leaders think all I do is bash them,” Obama said.

“No one is more frustrated than me,” the president told the group. “The Senate isn’t working as a democracy anymore.” He explained he had to make tactical concessions to enhance his political position: “You were nice not to kick me in the teeth over the pay freeze. I did it because the Republicans want to go further with layoffs and pay cuts. We can fight back because we put a pay freeze in effect. Giving up a little at the front end will help us fight a battle that’s coming.”

“We’re losing white males,” Obama pointed out, maintaining that was partly due to cultural issues: gun rights, gay rights, and race. “Fed by Fox News,” he said, “they hear Obama is a Muslim 24/7, and it begins to seep in. . . . The Republicans have been at this for forty years. They have new resources, but the strategy is old.”

This was Obama’s plea: I’m doing what I can in difficult circumstances, I have to be crafty, I have to concede to proceed. Please understand, he asked.

THOUGH OBAMA BELIEVED THE TAX-CUT DEAL WAS A MAJOR VICTORY, he felt he was stuck in a weak political position—up against a political culture decades in the making that denigrated the sort of government action the current crisis and the long-term needs of the nation demanded.

Rather than overpower this opposition, Obama was looking for ways to outsmart it, to seize what he could of its agenda and rhetoric, to devise a combination of cunning negotiation and strategic (intermittent) confrontation that would land him on the higher political ground. He was planning ahead, anticipating a tough year of complicated calculations.

But planning ahead—and avoiding fights to better prepare for the next one—doesn’t always work out as anticipated. In the frenzied days following the tax-cut deal, a moment suggesting the major trouble to come went largely unnoticed. It occurred during that press conference when Obama vividly defended the need to compromise. Toward the end, Marc Ambinder of the National Journal asked whether the outcome of the tax-cut talks would affect future negotiations with the Republicans on raising the debt ceiling.

Ambinder was peering into the future. In several months, the US government would have to lift the cap on the debt it could take on in order to cover the bills it had already accrued. Such a move would require an act of Congress. In years past, raising the debt ceiling had been a routine action supported by both parties because if the limit on borrowing wasn’t increased, the US government could enter default, and that could spark a financial crisis. But in this current climate—when Tea Party Republicans were on an antispending crusade—could Obama depend on the GOP to abide by long-established norms?

Senior administration officials had considered securing an increase in the debt ceiling as part of the tax-cut compromise, but that would have meant yielding to further GOP demands—and such a move could have threatened the entire deal. So this had been abandoned.

Ambinder, though, presciently asked the president if the Republicans would hold the debt ceiling hostage and refuse to raise the cap unless the White House would agree to severe spending cuts.

Obama dismissed such a fear:

I’ll take John Boehner at his word that nobody, Democrat or Republican, is willing to see the full faith and credit of the United States government collapse, that that would not be a good thing to happen. And so I think that there will be significant discussions about the debt limit vote. That’s something that nobody ever likes to vote on. But once John Boehner is sworn in as speaker, then he’s going to have responsibilities to govern. You can’t just stand on the sidelines and be a bomb thrower.

Moments earlier in this press conference, Obama had referred to Boehner as a hostage taker who didn’t care about the governed. Yet now he appeared to be assuming that the hostage grabbing was done and that once Boehner and his colleagues were running the House, they would eschew their terrorist ways and behave reasonably.

“We were not Pollyannaish,” Axelrod later insisted. “We knew the third year would become much more difficult.”

But how much more difficult? Was Obama fully prepared for what was ahead? The president had done well in the recent negotiations, whether or not that was realized by the politerati or his fellow Democrats. Yet there were other high-stakes negotiations on the horizon—and other hostages to be seized.