The battle continued on CNN’s State of the Union, with Treasury Secretary Timothy Geithner telling Candy Crowley that the White House is prepared to send the country over the fiscal cliff if Republicans don’t agree to raise tax rates. “There’s not going to be an agreement without rates going up,” Geithner said. Crowley pressed him, asking specifically whether he was prepared to send the nation over “the cliff” if Republicans continued to refuse an increase, and Geithner stuck to his original answer. “If Republicans are not willing to let rates go back up—and we think they should go back up to the Clinton levels,” he said, “then there will not be an agreement.” Here we go again.

Graham: ‘I Think We’re Going Over the Cliff’

The fiscal cliff hostage crisis is soon to enter its fourth week. But really, the talks about ransoming the hostage haven’t even begun. Typically in a hostage situation, the party holding the hostage sets out its demands. President Obama has finally done that, with Treasury Secretary Geithner personally presenting the plans to Congressional Republicans on Thursday. There’s nothing surprising about the Republicans’ dismissive response.

There is something surprising, however, about the Republicans’ failure to offer an alternative. To be sure, there has been a well-documented, and sudden outbreak of real-keeping among Congressional Republicans, with dozens of legislators abandoning Grover Norquist’s no-tax pledge and acknowledging the need for more revenues. But the guys who want to liberate the tax cuts being held hostage have yet to propose an offer.

And the leadership still does not seem to grasp what is happening. This is not August 2011, or August 2012. The choice before McConnell and Boehner is not between the really unattractive proposal President Obama is offering and their preferred solution, which is the status quo on taxes plus huge cuts in discretionary spending and immediate action on entitlements. Rather, the choice is between what the President is offering—i.e. lots of tax increases paired with small spending cuts and very modest entitlement reform—and the 24-pack of whoopass that the fiscal cliff will deliver in about five weeks: much larger tax increases, plus much larger spending cuts, and no entitlement reform whatsoever.

Yes, President Obama wants to avoid the fiscal cliff. But he also wants to avoid being made to look like a chump, as repeatedly happened in his first term. And so rather than make a proposal and then respond to a stiff arm with a better offer, he is refusing to negotiate with himself. Instead of compromising on his initial offer—and hoping that meeting the Republicans half way with an initial offer will help bring them to the table—he went the other way. The president moved his goalpost further to the left. And rather than try to play an inside game and issue pleas for comity and compromise from the White House, he’s taking his popularity on the road.  

“In fact,” he added, “the real fiscal cliff comes when our creditors want their money back and we don’t have it.”

He may be right. The amount of debt held by the public has increased from $4.9 trillion in the beginning of 2007 to $11.5 trillion today—from 36 percent of GDP to 75 percent of GDP. The last time our debt-to-GDP ratio was this high, Harry Truman was president.

While of course a lot of that was loaded on during the financial crisis, our debt is still increasing by about $2 billion a day. With interest rates so low, that much debt is not currently a problem. But if interest rates increased just 2 percent, we’d have to pay an additional $230 billion every year in interest costs. If they go up to 5 percent, which would be closer to their historical norm, we’ll be on the hook for half a trillion dollars a year—on top of our ballooning bills for baby-boomer retirements.

Creditors are fully aware of this dismal math; they’re lending to us mostly because other countries are even worse. But how long will we be able to keep borrowing $1 trillion a year?

Watching and reacting to what Congress people say about the cliff negotiations and the prospects of a deal won’t give you an edge—regardless of what the headline writers say. Why? Well, the overwhelming majority of stuff that elected officials say to the public is bulls--t.  What they say has no bearing—frequently on the truth, or on whether a deal will get done. When someone says they’re optimistic about something about to happen, they could be genuinely optimistic—or they could be full of it.

Also, investors don’t seem to be very good at figuring out who really matters in these debates. The other day, CNBC’s Michele Caruso-Cabrera told a Democratic House member, Raul Grijalva, that his remarks against concessions on entitlements were making the stock market go down. Grijalva is a member of the minority in the House; most investors had likely never heard of him before his appearance.

More broadly, the market—and many of those who interpret the market’s mind on our behalf—have an extremely simplistic and wrongheaded view of what is good for it. The conventional investing wisdom assumes that a deal—any deal—to avert the fiscal cliff will be good for stocks and the economy at large. That may be true. It may also not be true. In fact, I suspect that at the end of the day the people who are agitating most ardently for a big deal are going to be very disappointed. Compared with a few weeks ago, we are much less likely to have major entitlement reform and more likely to have large tax increases on the rich, with marginal rates rising, taxes on capital gains and dividends rising, and the rich losing some of their cherished deductions. The investor class has been begging for a resolution. The resolution they’re likely to get could be a sharp slap in the face.

Will that be good for stocks in 2013 and beyond? Who knows? In fact, hiking taxes significantly on investors may not influence the markets at all. My colleagues in the politico-financial industrial complex vastly, vastly overvalue the relation of government policy and marginal tax rates to asset prices in the stock market—especially my colleagues on the right side of the aisle.

There is probably no better example of this trend than Sheldon Adelson, the chairman and CEO of the casino giant Las Vegas Sands who was a prolific backer of Republican candidates in 2012. Adelson and his wife, who together control more than half the company, will likely earn some $1.2 billion from the company’s special dividend payout of about $2.3 billion.

Members of the Brown family, who control most of Brown-Forman’s voting stock (the CEO, however, is from outside the family), will get around $234 million from the dividend the company is paying. Brown-Forman, according to its most recent quarterly filings with the SEC, has $361.5 million in cash on its balance sheet. The ratings agency Fitch projects that the roughly $850 million payout will be debt-financed, meaning that the company would have to borrow money (likely at rock-bottom interest rates) to get money to its shareholders, a subset of whom own the shares that actually let them control the company. Both Las Vegas Sands and Brown-Forman also announced increases in their regular scheduled dividends going forward.

But it’s not just the insiders who are giving themselves piles of cash as soon as they can. Costco, the retail giant and liberal darling (co-founder Jim Sinegal spoke at the Democratic National Convention) announced Wednesday that it will be giving back around $3 billion to its shareholders in a special $7 a share dividend. In a statement announcing the payout, Costco Chief Financial Officer Richard Galanti said the dividend was part of “our latest effort in returning capital to our shareholders” and that the retailer’s “strong balance sheet and favorable access to the credit markets allow us to provide shareholders with this dividend.” The company didn’t mention the prospect of tax rates rising, but it did make sure to note that the dividend is “to be paid before the end of the calendar year.”

The rash of dividend payouts is a great case study of the way public policy can affect corporate decision-making. One of the explicit goals of the Federal Reserve’s quantitative easing policy was to bring down interest rates on corporate bonds and thus enable more corporate borrowing and investment. These low rates and possibility of a large jump in dividend taxes make a large, one-time dividend irresistible to companies who want to do right by their shareholders. Thanks to the Fed, money is close to free for profitable companies. Thanks to the fiscal cliff, companies have a huge incentive to pay out big dividends now. The low-interest rates it has engineered may not exactly be leading to as much, say, hiring and factory building as the Fed would like. But the dividends to large shareholders will provide ready stimulus to the asset management, vacation home, and boat industries.

In theory, these CEOs all need and want the U.S. economy to grow to prosper. (Although truth be told, many of them don’t. One of the participants in the meeting is Muhtar Kent, CEO of Coca-Cola, which last year sold only 22 percent of its drinks volume in North America.)

When they get involved in public policy, CEOs have to balance concern over their personal situation (all these CEOs would get hit hard by an expiration of the tax cuts), concern for the national economy, and concern for the impact on the companies they run.

Defense contractors, for example, couldn’t care less about the payroll tax cut, which is probably toast. For them, the sequester—the automatic, blunt cuts in defense spending that kick in starting Jan. 1—must be averted at any cost. By contrast, a retailer like Macy’s, which derives most of its revenue from sales of stuff to middle-income Americans, cares not a whit about the sequester. It is more concerned about the payroll tax cut disappearing and marginal rates rising on lower-income earners. (Macy’s CEO Terry Lundgren was among the group of CEOs at the White House.) The White House helpfully spelled out the potential damage to retailers in a paper it released this week: “The CEA estimates that consumers could spend nearly $200 billion less than they otherwise would have in 2013 just because of higher taxes.”

Those who live and die in the global capital markets, like Goldman Sachs (CEO Lloyd Blankfein was on the roster), won’t get too exorcised about the prospect of middle-class Americans paying more taxes. But with the average Goldman employee making $367,056 in 2011, the prospect of higher marginal rates on high earners is terrifying. And the fact that taxes on capital gains and dividends are set to double in January will certainly impact the company’s ability to profit.

“It’s called the new reality,” former Republican chairman Michael Steele tells me. “We can no longer afford to marginalize ourselves as a party.” The GOP has gone “off the rails,” he says. “We are becoming increasingly irrelevant to the political conversation.”

If so, Republicans are trying to push their way back into that dialogue. Here’s Sen. John McCain on abortion, telling Fox News Sunday that the party should “leave the issue alone.” McCain says he’s “proud” of his anti-abortion-rights stance, “but if someone disagrees with me, I respect your views.” This from a party that has longed vowed to back a constitutional amendment to ban abortion.

Here’s one GOP senator after another—Lindsey Graham, Bob Corker, Saxby Chambliss—saying he no longer feels bound by the Grover Norquist pledge against voting for tax increases. As Chambliss put it, “I care too much about my country—I care a lot more about it than I do about Grover Norquist.”

But pledges can’t release a hostage. And three weeks into the crisis, elected Republicans are finally waking up to the reality that if no evasive action is taken, tax rates on income, capital gains, and dividends will rise in just five weeks. Averting such an unwanted effect requires reaching a deal with President Obama and the Democrats. And reaching such a deal requires acknowledging a need for more revenues.

It took a while, but Republicans have started to throw Commissar Norquist under the bus. Last Wednesday, on the eve of Thanksgiving, Sen. Saxby Chambliss of Georgia said “times have changed significantly, and I care more about my country than I do about a 20-year-old pledge.” Appearing on ABC’s This Week on Sunday, Sen. Lindsey Graham of South Carolina said he would be willing to violate the pledge “for the good of the country.” Rep. Peter King of New York echoed the sentiment.

Effectively, some Republicans seem to be telling Norquist and the anti-tax absolutists that the game is over. If Republicans want to avoid the huge tax increases that will ensue when the U.S. flies off the fiscal cliff, they’ll have to be active participants in some tax increases. Sen. Bob Corker of Tennessee, has explicitly tried to become part of the solution by proposing in the Washington Post a 242-page plan that would reduce the deficit by $4.5 trillion through spending cuts, changes to entitlements, and capping tax deductions for the wealthy.

Luckily, there is a well-worn path from two years of failed negotiations—Bowles-Simpson, the Gang of Six, and the Obama-Boehner grand bargain—that include specific proposals backed by Democrats on entitlement reform. These will be the basis for finding common ground going forward.

The postelection debate to date has mostly been about Republicans slowly coming to grips with the need for tax-revenue increases. But with divided government, spending cuts and entitlement reforms also will have to be part of the prescription.

The GOP reluctantly learned this election that ideological extremism and obstruction is not a winning formula. It will be willing to negotiate to an extent far greater than in the past. The challenge for President Obama will be to provide second-term substance to his first-term style as a reasonable man in an unreasonable time. It is the price of leadership.

I learned a lot of things editing this package--for example, about what it's like not to have a normal bank to rely on and to have to resort to payday lenders. I learned a great deal from a really interesting article in the package on the special economic burdens placed on people who live in manufactured homes (trailer parks, although these days the houses are a lot nicer).

Tomorrow morning, Democracy and CFED are hosting an even at CFED's offices to discuss the issues raised in the symposium. CFED's Andrea Levere will introduce Oregon Democratic Senator Jeff Merkley, who will deliver remarks, after which there will be a panel with three symposium contributors, moderated by Jim Tankersley of The National Journal.

It's booked, but there is a webinar, to which I'm told 300 people have subscribed, which strikes me as a highly respectable number. If you'd like to watch, sign up here. Thanks.