Over The Fiscal Cliff

With the election over and President Obama able to claim a mandate to continue the policies of the past four years, what are the chances of a deal being struck to avert the impending fiscal cliff? In his victory speech, the President said he would work with Republicans on a deal. House Speaker John Boehner signaled his willingness to compromise. So this should be a no brainer, right?

No way. I think the odds favor our going over the fiscal cliff. First, Obama has never been much for compromise. If we are to believe Bob Woodward, the President backed out of a deal he had struck with the Speaker on a “grand bargain” because the tax hikes it called for didn’t go high enough. In every election between 2009 and 2011 his party lost; yet, he stayed on course. The Democrats took a shellacking in the mid-term elections and the President never blinked, never paused, and never tacked to the center a la Bill Clinton. That is one of his strengths. Remember that it was the White House that proposed sequestration, playing a game of chicken with the Republicans. Now that he has won again and never has to be beholden to anyone again, why should the President cut a deal or at least one on anything but terms so onerous that the Republicans would be discredited by agreeing to them?

Second, the Republican Party has nowhere to go. Despite calls from some of its weak-kneed members to move to the center that will not be enough to gain them credit with the Democrats or credibility with the electorate. The last time the House had a deal on taxes and spending it was for one dollar of tax increases for about two dollars of spending cuts. Does anyone think that the President will offer the same deal this time? According to studies reported in the Wall Street Journal, the optimum ratio of tax increases to spending cuts to both reduce deficits and stimulate the economy is about 1 to 5. If the President offers even less this time than he did the last time, how can Speaker Boehner accept? Well he might, but I suspect the Republican Caucus in the House will not.

Third, the Democratic leadership of the Senate has already signaled that it is going to play the same kind of hardball it did for the past four years. Majority Leader Reid has said he plans to limit Republican filibusters. Senator Schumer has declared no tax reform without higher rates. So what is in it for the Republicans in either the Senate or the House? Answer: nothing.

Fourth, the President will want to reward his stalwart supporters, particularly the public sector unions. This means that any proposed spending cuts will be measly and pushed out into the future. If anything, the President is likely to propose spending more money for government workers. There is also the threat to bring back proposals such as Card Check which were soundly trounced in the past.

Fifth, the Republicans cannot shape a course to election victory by becoming a paler shade of blue. Compromising on fundamentals will not get them any additional votes in 2014. Nor can they get to the left of the Democratic Party on taxes and spending. In fact, given the political situation in Washington, if the Republicans give on this issue, they will show that they can be steamrolled on every issue. By the way, there is no evidence that the losses they experienced on election night were due to being insufficiently liberal on economic issues. The only hope that the Republicans in the House have to retain their seats, hold a majority and even recapture the White House is, with respect to economic issues, holding the line against a profligate White House and Senate.

So, if the President won’t compromise and the Republican House leadership doesn’t cave, we are going over the fiscal cliff. Given the issues at stake, it will be the right thing to do.