In itself, the so-called fiscal cliff was always a poor metaphor, as if the nation’s economy was dangerously close to a fatal dive. There were some perils, but the fundamental implication of inaction would have been for the White House to get a clean slate for 2013. I assumed, wrongly it turns out, that President Obama would intentionally fail to reach a deal with Republicans in Congress because his incentives were weighted heavily that direction. Instead, a Senate deal and a conflicted House GOP led to a last-minute agreement. The House voted in favor of the Senate deal last night. On its face, the resolution is a major Obama win, but I really think that’s all wrong.
Think about Obama’s incentives. Polls say that Republicans would get the bulk of the blame if no deal was reached. The sunset of all the “Bush tax cuts” meant that the White House would immediately reframe the fiscal conversation as a package of Obama proposals. The DC punditry would have spent the next many, many years talking about these as “Obama tax cuts” which is not a bad brand for the Dems to build on. Third, the sequester of defense expenditures is something that many extremists on the left dearly desire, and I am not sure the President disagrees. He got none of this. Instead, he’s played his ace card: his singular identity of wanting to tax the rich more will soon be law of the land. For what? Kicking the sequester can to March 1?True, tax rates went up on the rich, but again, that ace card has now been played. It cannot be played again.
Perhaps Senator McConnell outfoxed them all. Perhaps Obama thought that forcing Republicans to vote for tax rate increases on incomes over $400,000 per year with nary a spending cut was such good politics that it was worth locking in bad economics. The whole thing seems like a wasted opportunity to me, as it does to many others (see Bob Samuelson, Bill Gale, and Mssrs. Bowles & Simpson).
It’s a shame that Speaker Boehner is taking such a beating from all sides because his actions, to me at least, show more leadership than almost anyone. His incentive was to get a deal done, a genuine compromise. Boehner’s Plan B, and surely his private offers as described in press reports, embodied the principles of good, wonky, bipartisan, fundamental tax reform. Deduction caps to raise revenue! Great idea! Modifying inflation of entitlements to actually reflect real inflation and trim the growth of entitlements. Great idea! While the President promised the poetry of “Balance,” the Speaker actually made offer after offer with equal parts revenue and spending cuts. All this goodness was spurned by the White House, to its shame.
What stinks about the final bargain is that it reveals a President unwilling to countenance even the mildest of spending restraint in the most severe crisis with the most compelling economic environment. The fiscal cliff metaphor is overrated, but the long-term fiscal crisis is not. The cost of the ATRA bill, according to the CBO, is an additional $3.6 trillion in debt over ten years. The nation sits atop a mountain of unstable debt dynamite, and every year more is added to the mountain. A trillion dollars per year, funding principally by artificially low interest rates due to monetizing by the Fed. How long can the Federal Reserve bail out the fiscal ship of state?
Maybe Obama thinks the Fed is his ultimate ace card. But when the crisis comes, when the bond market hesitates to buy new T bills with vigor, the President and the nation will be caught empty-handed.