WASHINGTON, DC, 24 December 2012 — President Obama is having a very merry Christmas. He won reelection, the GOP doesn’t know where it’s going, and now we’re set to go over the fiscal cliff. Things could hardly get any better.
Won’t going over the fiscal cliff cause a spike in unemployment and a five percent cut in GDP? Perhaps, but the common misperception is that we fall off the fiscal cliff and immediately go “splat” on the rocks below. The world of Washington is more like a Roadrunner cartoon. We can go off the cliff, stand there and contemplate our position, and run back to the edge. We can begin to fall, then frantically swim our way through air back to the top. We can hit the rocks, then pick ourselves up and wipe away the dust as long as a safe doesn’t fall on top of us. Whatever happens can always be rewound.
If Congress undoes the fiscal cliff in January, it can do it retroactively to the beginning of the year. There won’t be sudden mass firings across the country, the sudden shuttering of factories. You won’t pay higher taxes for the entire year until the year is gone, and you won’t see a tax bite at all until you get your first paycheck of the new year. Congress has at least that long to act before we begin to fall.
However, if Congress waits to act until January, it won’t be passing legislation to extend tax cuts, but to repeal them. The GOP doesn’t want rates to go up on the “rich” ($250,000 per year in New York City or San Francisco makes you middle class, not rich, especially if you have kids), but after we run off the fiscal cliff, they’ll have gone up automatically. Then the battle will be which rates to bring down.
That will be a losing battle for the GOP. What will it do, refuse to cut taxes on people making $70,000 because it can’t get Democrats to cut them for people making $500,000? How well will that play back home when the paychecks start to shrink? It’s much, much harder to refuse to cut taxes for some if they aren’t cut for all than it is to keep them from rising for all if you can’t keep them from rising for some.
With taxes rising for all, Obama and Senator Harry Reid can now offer to cut them for some, and the GOP can accept or decline. They’re playing what economists call an “ultimatum game,” and it’s a game they can win in the short run only if they convince the Democrats that they will play in an absolutely irrational way. The GOP must threaten to burn the entire house down. That, however, isn’t a strategy that will appeal to a man like House Speaker John Boehner, whose biggest problem in dealing with Obama has been that he is in fact a rational man. The Democrats have been able to take advantage of that.
When they rejected Plan B, the House Republicans put themselves in a much weaker bargaining position. Now Obama doesn’t have to bargain with them for a cutoff below $1 million for a tax hike; he can pretend to play the game of bargaining with Harry Reid for a cutoff between $250,000 and the $400,000 he said that he’d accept. And if Reid won’t settle for anything more than $250,000, well Obama will just say he has to sign it. Then let the Republicans stand firm and make everyone’s taxes go up. Moderates and Democrats will team up to “save the day” for America.
From Obama’s perspective, the spending side of this is just as good. Sequestration is being treated as a potential disaster, but it doesn’t include entitlements like Social Security. Entitlements are what Republicans want to cut and reform, and they’ll have to negotiate for those cuts. Everything else, including things that Republicans would much prefer not to see cut, gets cut automatically.
Not only do the Republicans have to negotiate to get the cuts they want, they have to negotiate to remove the cuts they don’t want (the military budget, for instance). There are sequestration cuts the Democrats don’t like as well, but they have the upper hand.
Going over the fiscal cliff gives Democrats some things they want automatically. It forces Republicans to bargain with them to make some of those things go away. From a political perspective, they aren’t Butch Cassidy and the Sundance Kid running over a cliff together, or Thelma and Louise launching themselves into the abyss. They’re the Roadrunner and Wyle E. Coyote, and in this round, the Republicans are Coyote.
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At any rate, the ball is in the Democrats’ court. After seeing his Plan B rejected last week, Boehner channeled another cartoon character, Eric Cartman, and said to the rest of Washington in his press conference, however diplomatically, “screw you guys, I’m goin’ home.” President Obama might as well have said the same thing to America, hopping on Air Force One and going home to Hawaii. Now everyone has gone home for Christmas. The utter lack of urgency from the Senate and the White House suggests that they don’t see the fiscal cliff as a problem, but an opportunity. It’s very Chinese of them. As for the rest of us, we get to live in interesting times.
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