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Fiscal Cliff Divers

The Thelma & Louise Caucus

Up for a cliff dive? The outliers in the Thelma & Louise Caucus are—they believe careening over the fiscal cliff is a necessary step to rationalize our tax code. Dan Gross explains why he’s one of them.

Tuesday was Day 14 of the Fiscal Cliff Hostage Situation. With Congress out of session and most representatives heading home for Thanksgiving, there weren’t any formal talks. The presumption seems to be, however, that Congress and the White House will come together to make a deal before Jan. 1, thus preventing tax rates from soaring and feared automatic spending cuts from kicking in.

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President Barack Obama speaks before Speaker John Boehner, Secretary of the Treasury Timothy Geithner and other cabinet members during a meeting on November 16, 2012 in Washington, DC. (Toby Jorrin / AFP / Getty Images)

Most voices in official Washington earnestly assure Wall Street, the wealthy, and companies that they want nothing so much as to make a deal in the next several weeks. And we should take them at their word. But here and there, it’s possible to detect voices who are urging inaction. Some people, left, center, and right, believe careening over the cliff would be an affirmative good, a willful act of liberation, a step that is necessary to rationalize our tax code. I’ve dubbed these folks the Thelma & Louise Caucus. And I count myself a member.

Comparatively few members of Congress can be seen actively advocating for a lack of resolution. It’s frowned upon. But Sen. Patty Murray, the high-ranking liberal Democrat from Washington, isn’t afraid of the cliff. As Matt Yglesias of Slate points out, Murray in July spoke of the utility of going over the cliff in purely practical terms. In her view, the expiration of the Bush tax cuts establishes a new baseline of significantly higher rates, which would then make it much easier for Republicans to sign off on a tax cut deal. “We will have a new fiscal and political reality,” Murray said. “If the Bush tax cuts expire, every proposal will be a tax-cut proposal, and the pledge will no longer keep Republicans boxed in and unable to compromise.” And, in Murray’s view, this gives Democrats the upper hand. “If middle-class families start seeing some money coming out of their paychecks next year, are Republicans really going to stand up and fight for new tax cuts for the rich?” Without the cliff, there’s no prospect of a deal.

Other members of the Thelma & Louise Caucus believe the cliff is desirable for reasons of justice, not of tactics. Jonathan Cohn, the longtime reporter and Ann Arbor–based health-care maven at The New Republic, is the president of the Michigan chapter of the caucus. For Cohn, the cliff solves all sorts of problems. He never liked the Bush tax cuts to begin with and says we need the money. “I always thought that we should get rid of all the Bush tax cuts,” he said. “It seems to me the Clinton-era tax rates were just fine.”

Jonathan Chait of New York magazine, who is a native of Michigan and formerly worked at The New Republic, represents the realpolitik wing of the caucus. Even before the election, he was gaming out the smart politics behind a cliff dive:

“On the morning of November 7, a reelected President Obama will do … nothing. For the next 53 days, nothing. And then, on January 1, 2013, we will all awake to a different, substantially more liberal country. The Bush tax cuts will have disappeared, restoring Clinton-era tax rates and flooding government coffers with revenue to fund its current operations for years to come. The military will be facing dire budget cuts that shake the military-industrial complex to its core.”

Going over the cliff, Chait argues, will finally allow Obama to turn the tables on the obstructionist Republicans who have made his life hell for the past four years. And he will be able to give up trying to compromise with House Speaker John Boehner because the nature of the game changes. Obama and his crew, Chait writes, “understand something important, something that has not quite sunk in with wary liberals, obstinate conservatives, or split-the-difference deficit scolds: They no longer have to.”

Dire

Bernanke: Make Fiscal Cliff Deal Now

Bernanke: Make Fiscal Cliff Deal Now Saul Loeb, AFP / Getty Images

Urges Congress to raise federal-debt limit.

Federal Reserve Chairman Ben Bernanke warned Congress on Tuesday to make a deal and avoid the automatic tax increases and spending cuts known as the “fiscal cliff” that could take effect in January. He also urged Congress to raise the federal-debt limit to prevent the government from defaulting on the Treasury’s debt, adding that Congress must also reduce federal debt in the long run. “A stronger economy will in turn reduce the deficit and contribute to achieving long-term fiscal responsibility,” he said.

Read it at Associated Press

article

Don’t Believe the Hype

Will we have a deal in 2012? Market watchers say yes, but the GOP remains solidly anti-tax, and big businesses like Walmart aren’t taking any chances. Daniel Gross reports.

On Day 13 of the Fiscal Cliff Hostage Situation, the prevailing mood about a deal to head off tax increases and spending cuts was optimism—even complacency … at least in New York.

Last Friday, President Obama held meetings with congressional leaders. When the protagonists emerged and declared them to have been productive, the stock market began to rally. The optimism continued.

gross-fiscal-hostage-tease

President Barack Obama speaks before Speaker John Boehner, Secretary of the Treasury Timothy Geithner, and other cabinet members during a meeting on Nov. 16, 2012, in Washington, D.C. (Toby Jorrin / AFP / Getty Images)

Monday morning. As the CNBC.com headline put it, “Dow Soars 150 on Cliff Hopes.”

In fact, there seems to be a growing consensus among those who follow markets with the same ardor as they do on MSNBC that something is happening. A deal will get done, simply because it has to be done. Time is running out, and if no grand bargain is reached, bad things will happen. Wall Street, whose denizens have the most to lose from a vault over the fiscal cliff, craves a resolution. Which is one of the reasons CNBC is running its “Rise Above” campaign, which calls for Washington to eschew partisanship and make a deal to avoid the cliff.

On Sunday night, Goldman Sachs—the firm believed by many to control Washington, D.C.—sent out an optimistic note, suggesting that the hostage would be released in a few weeks: “We believe the ‘fiscal cliff’ ultimately will be avoided, but precedent suggests any resolution will not happen until mid- to late-December.”

Monday morning, Ben White, Politico’s sharp New York–based watcher of the calamitous intersection of Wall Street and Pennsylvania Avenue, declared it all over except from the shouting. “There seems little chance the cliff battle will go near or past the Dec. 31 deadline,” White wrote. “Nearly every signal from Republicans suggests they understand they have lost the war over taxes going up on the wealthiest Americans” and are figuring out how to cut their losses. “So while talks will continue and the public kabuki will play out for a few more weeks, we are really just waiting on a final score.”

That’s possible. But let’s take a step back. Just because the White House and congressional Republicans told us their meetings Friday were fruitful, it doesn’t mean they were. Hell, Neville Chamberlain thought his September 1938 meeting in Munich with the Germans was fruitful. To admit that a meeting was not fruitful is to admit that you wasted your own time, and, worse, the time of the media that staked out the meeting to get the anodyne post-meeting quote.

UNCERTAINTY

Investment Slows Amid ‘Cliff’ Fears

Investment Slows Amid ‘Cliff’ Fears Spencer Platt / Getty Images

But markets are hopeful for a deal.

American companies are scaling back investments amid uncertainty over the “fiscal cliff”—but markets abroad are more optimistic. A Wall Street Journal analysis found that some major American companies plan to slash capital expenditures this year and to put a hold on other big projects. In the short term, however, markets around the world rallied Monday as investors said they were hopeful that politicians in the U.S. would set aside their differences and strike a deal on the fiscal cliff.

Read it at The Wall Street Journal

BANTER WITH THE BEAST

Grover Norquist Won’t Back Down

With the fiscal cliff in sight, Washington’s most visible anti-tax lobbyist sees no reason to compromise. He talks to Lloyd Grove.

The fiscal cliff is rushing headlong into view, and Grover Norquist is at the wheel of his convertible, flooring the gas and steering toward the abyss—Thelma, figuratively speaking, to Mitch McConnell’s Louise.

That, anyhow, is the nightmare scenario concerning Washington’s preeminent anti-tax lobbyist and the Senate’s diehard Republican minority leader, who, along with Speaker of the House John Boehner, seems determined to play chicken with the U.S. economy in order to thwart President Obama’s scheme to raise taxes on the top 2 percent.

Norquist—whose 27-year-old advocacy group, Americans for Tax Reform (ATR), famously pressures office holders to sign its pledge never ever to raise taxes for any reason whatsoever—is once again playing enforcer as the negotiations get underway. As usual, he’s publicly making his case in attention-getting, often-outrageous terms, and privately cautioning his signatories against doctrinal deviations, lest ATR run ads at election time pointing out their apostasy.

Norquist’s latest ploy, which he must know but won’t admit is a publicity stunt, is to demand that the negotiations be conducted on C-SPAN, the better to keep them honest. “No quiet rooms,” he says, a reference to a notorious Romney quote about where Washington controversies should be resolved. “They can be smoke-filled rooms, with Boehner smoking as much as he wants—and it has to be on C-SPAN so children can pick up bad habits.” Facetiously, Norquist adds, “That would raise revenue if we could get more of those 12-year-olds paying cigarette taxes.”

The defeated Republican presidential candidate, meanwhile, eagerly signed the ATR pledge, but Norquist—whose relationship with politicians seems entirely transactional—has little use for him now. “I don’t think we take political advice from a guy who kicked away the presidency,” he says in response to Romney’s recent musings that Obama owes his victory to the generous dispensing of “gifts” to various interest groups in the Democratic base.

Congress Tax Pledge

J. Scott Applewhite / AP Photo

As for flying off the fiscal cliff, Norquist sounds untroubled. “I would rather that the sequester take effect than it be delayed or eliminated,” he tells me, referring to the harsh 8 percent across-the-board reductions in the discretionary budget, including a 9 percent cut in defense spending, which by law are scheduled to occur Jan. 1 if Congress and the White House can’t agree on a fiscal plan.

“I’m for the spending cuts,” Norquist says. “Just let them take effect. My first preference, like most Republicans in the House, is the Ryan budget [the draconian handiwork of Romney’s running-mate, House Budget Committee Chairman Paul Ryan, which passed the Republican-led House in March and quickly died in the Democrat-led Senate] … It lowers the tax rate, saves the same amount of money, and doesn’t hit the defense budget as hard. The only thing worse than the sequester would be not reducing spending.”

AND SO IT BEGINS

Fiscal Cliff Talks Seem Promising

Fiscal Cliff Talks Seem Promising Shawn Thew / EPA / Landov

President ready for “tough compromises.”

President Obama and congressional leaders seemed in good spirits Friday as they had the first in a series of sit-down talks on a possible deficit-reduction deal that would prevent the country from careening off the “fiscal cliff.” Obama opened his first post-election meeting with lawmakers on both sides by noting that the biggest challenge will be to ensure they can “cooperate together” and “make tough compromises.” Lawmakers appear to have gotten off on the right foot, agreeing to discuss reforming tax code and “entitlement” programs—at this rate real cooperation could be in the future.

Read it at Reuters

Day Nine

Fiscal Cliff’s First Victim?

In his latest dispatch from the precipice of tax hikes and spending cuts, Daniel Gross on the hostage no one wants to save: the payroll tax cut.

We’re now in Day Nine of the 2012 Fiscal Cliff Hostage Situation

Social Security Good Deal

Bradley C Bower / AP Photo

On Wednesday, the CEOs came and went from the White House. Talks between Congressional leaders and President Obama are slated to kick off tomorrow. As Thanksgiving approaches, the White House is still holding the Bush-era tax cuts hostage. What’s more, automatic budget cuts that will affect major contractors are slated to kick in on Jan. 1—the same cruel day that tax rates on capital gains, income, dividends, and states rise.

In theory, it’s all open to negotiation. The tax cuts could be warded off through simple legislation. A deal could forestall some of the tax increases, or a package of tax reforms could provide higher revenue, thus obviating the need for marginal tax increases. And so while the Bush tax cuts are in jeopardy, they’re still very much alive. But the standoff may have already claimed one victim. One of the hostages is clinging to life, and will not likely emerge alive from the standoff: the temporary payroll tax cut.

The payroll tax cut—or tax holiday—was not part of the Bush-era tax cuts. Rather, it was a post-stimulus effort to goose the economy in 2011 and 2012. As Mitt Romney and his allies have famously pointed out, 47 percent of Americans don’t pay any income tax. But pretty much everybody with a job pays payroll taxes—the regressive 6.2 percent tax levied on the first $100,000 or so of income that funds Social Security and Medicare.

In late 2010, as President Obama suggested, Congress approved a temporary one-year payroll tax cut that reduced the rate from 6.2 percent to 4.2 percent. This was part of a larger package in which Congress extended the Bush tax cuts for two more years and threw in extended unemployment insurance. Since many people pay more in payroll taxes than they do in income taxes, the cut was quite meaningful. Somebody with a salary of $50,000 would see an extra $1,000 in her paychecks over the course of the year. And since such middle-income earners are likely to spend—rather than save—these tax cuts, it was a pretty effective form of stimulus. The estimated cost for 2011 was $112 billion.

Now, the beauty of a temporary tax cut is that you can always accuse the other side of wanting to increase taxes if they simply want to let the temporary measure expire as it was designed to do. That’s the tactic Republicans have been using against Democrats and Obama with the Bush tax cuts for the past several years. Obama briefly turned the tables on the Republicans over the payroll tax in late 2011. And so, at the end of 2011 with the economy growing slowly and concerns about the ability of consumers to sustain the recovery, Congress and the White House struck another deal to extend the 4.2 percent payroll tax rate through 2012. Another 12 months, another $100-billion-plus into the consumer economy.

For the past several months, both sides have pretty much assumed that the payroll tax cut would fade away at the end of the year—regardless of who won the election. Why? Republicans never really liked it; in theory, the tax cuts undermined Social Security and Medicare, which is vital to their geezer constituents. What’s more, it’s a tax cut on wages of typical workers. And for ideological and personal reasons, Republicans much prefer cutting taxes on high earners, and on investment and estates. That’s where the real money is.

Money 

CEOs Woo Obama 

Fiscal Cliff

Clockwise from left: President Barack Obama, Goldman Sachs CEO Lloyd Blankfein and Pepsi CEO Indra Nooyi. (AP Photo (3))

Corporate America went all in on a Romney victory. But as pragmatists, they’ve come around quickly. By Daniel Gross. 

It’s day eight of the fiscal cliff hostage crisis situation. And while a resolution still seems far off, there have been some significant changes. For the first time, President Obama, the holder of the hostage, has issued his demands. And a new set of external players is entering the scene: America’s chief executive officers.

Here’s the state of play. Come Jan. 1, the U.S. will go over the fiscal cliff. The Bush-era low tax rates on income, capital gains, dividends, and estates will expire. At the same time, automatic cuts that will affect defense contractors and other industries dependent on government will kick in. In the wake of last week’s election, President Obama came into control of items that Republicans in Congress desperately want. If Obama simply sits back and does nothing, the wealthy will have to start paying more taxes and the greatest Republican legislative achievement of this young century will disappear in a matter of weeks.

In previous installments, we’ve documented how Republicans have already made significant concessions—first acknowledging the need for more revenues in any deal, and then saying those revenues should come primarily from eliminating tax breaks for the wealthy. Meanwhile, Democrats have generally stood fast and have increased their demands.

The last 24 hours have brought new developments. First, President Obama has laid out a marker for a grand bargain—and it’s a much more aggressive one than he has put out there previously. The Wall Street Journal reported, in advance of a meeting Friday with congressional leaders, Obama is calling for “$1.6 trillion in additional tax revenue over the next decade, far more than Republicans are likely to accept and double the $800 billion discussed in talks with GOP leaders during the summer of 2011.” Ouch. For those counting at home, that’s twice as much as was on the table just 13 months ago. As for the Republican suggestion that all the revenues come from tightening tax deductions and loopholes? Forget about it. Treasury Secretary Tim Geithner, appearing at a Wall Street Journal event, said Obama is “not prepared to extend the upper-income tax cuts.” So as Republicans edge closer to the Democrats’ position, the Democrats are moving away from the Republicans.

Now, America’s CEOs are getting involved. This evening, President Obama will meet with a group of top bosses at the White House to discuss the fiscal cliff and other economic issues. Among those attending: Pepsi CEO Indra Nooyi and GE CEO Jeff Immelt. To the extent corporate America got involved in the 2012 election, it was generally on the side of Mitt Romney. Lobbying organizations like the Chamber of Commerce funded huge anti-Obama advertising campaigns, while lots of CEOs contributed to anti-Obama Super PACs.

In effect, CEOs, especially Wall Street CEOs, went all in on a Romney victory. But as pragmatists, they have come around rather quickly. Many CEOs are genuinely freaked out at the prospect of the fiscal cliff. “At a Wall Street Journal CEO conference in Washington, 73 percent of participants said their primary concern was the so-called fiscal cliff,” the Journal reported Wednesday. But the bosses seem to be more worried about the impact of a slowdown on their companies’ bottom lines than on their own. An informal show of hands at the conference showed many of the CEOs were personally willing to pay higher taxes to reduce the deficit. In the precincts of the rich, there is rising acceptance that their personal tax rates will be higher next year.

Goldman Sachs CEO Lloyd Blankfein took to the op-ed page of The Wall Street Journal to offer an olive branch of sorts. Expressing concern that the fiscal cliff would “derail the fragile recovery,” he urged Congress to act. He accepted the premise that revenues must be part of the deal. “A number of CEOs and companies agree and support principles that call for a comprehensive and balanced solution to the debt problem—increased tax revenues and decreased spending,” he wrote. Blankfein also seemed to accept that tax rates on personal income would have to go up. “Broadening the personal income-tax base by closing loopholes will generate substantial additional revenue while minimizing increases in marginal tax rates [my italics] that could stifle risk-taking and robust growth.” Notice the small but important change here: increases in tax rates on personal income should be minimized, not ruled out. In other words, Blankfein’s position is quite closely aligned with Geithner’s.

Now, Blankfein doesn’t speak for the Republican Party any more than Robert Rubin speaks for the Democrats. But to have the CEO of one of America’s most powerful investment banks publicly make the case that it is OK for marginal tax rates to rise is significant. It’s amazing the difference a week makes.

SELL!

Will Credit Downgrade Matter?

One ratings agency is threatening to downgrade the U.S. if we go over the fiscal cliff. But the markets are unlikely to care one way or the other.

Once again President Obama and the congressional Republicans are in a showdown over the debt: the GOP wants to preserve low tax rates and enact large spending cuts, while the president wants less severe cuts and higher tax revenues from high earners. And just like last year’s tussle over the debt ceiling, ratings agencies like Fitch, Standard & Poor’s, and Moody’s are threatening to ding America’s sovereign credit rating if a long-term deficit deal isn’t reached. The only problem is that it’s unclear who, if anyone, cares about what the major ratings agencies have to say.

Last year, S&P knocked the U.S. down from AAA to AA following the last-second raising of the debt ceiling and the start of the legislative process that led us to the edge of the fiscal cliff—a move that generally signals to investors that they should start dumping bonds. But the markets responded by ... purchasing more Treasury debt.

Interest rates on 10-year Treasury notes, the widely accepted benchmark for the credit-worthiness of the United States, were 2.82 percent on July 29, 2011, two days before President Obama announced he had reached a deal with congressional leaders to raise the debt ceiling and avert a U.S. debt default. When the bond market closed the Friday afternoon before the downgrade announcement, the 10-year interest rate had fallen to 2.58 percent. The following Monday, it fell to 2.40 percent. And since then, the interest rate on the 10-year has fallen further. It stands at just over 1.6 percent today.

New York Stock Exchange

Traders work on the floor of the New York Stock Exchange, Nov. 7, 2012. (Allison Joyce / Getty Images)

So as the debt mounted, and as Congress and the White House refused to make a deal, investors proved willing to buy more and more U.S. debt—despite the sharply lower interest payments they receive. Just after the downgrade Warren Buffett, the world’s most famous (and successful) investor, told Bloomberg Television that the U.S. deserves a “quadruple A” rating.

The U.S. is now, once again, staring into the fiscal abyss. If Congress and the White House can’t cut a deal by Jan. 1, about $600 billion of spending cuts and tax hikes will go into full effect for 2013. Should this happen, the stock market could take a big dip. And if the cuts and tax hikes are maintained throughout the year, the economy could be dragged back into recession, according to the Congressional Budget Office.

One major ratings agency, Fitch, strangely believes that this lurch toward deficit reduction will make U.S. government bonds less attractive. It has warned that it will lower the U.S. credit rating from AAA if no deal is reached come Jan. 1. Fitch specifically acknowledges that it might counterintuitively lower its outlook for U.S. debt in response to the deficit being slashed. But Fitch apparently seems to be grading on style points. It argues that “a credible deficit-reduction plan [is] necessary to underpin economic recovery and confidence in the full faith and credit of the U.S.” Merely going over the cliff, said Fitch in its warning released last week, “would not fully address the longer-term drivers of higher public spending and the relatively narrow and volatile tax base.”

But if one of the major ratings agencies says the U.S. is no longer AAA and a recession looms, what will happen to the U.S. debt? In all likelihood, investors won’t be able to get enough of it. “I think you’ll probably see a replay of what you saw in summer in 2011, a big sell-off in equity markets into the safety of U.S Treasuries,” says Paul Edelstein, director of financial economics at IHS Global Insight.

TAXES, MAN

Soak the Rich?

Republicans are getting antsy. A key Romney adviser says kill deductions for the rich. Not so fast, writes Daniel Gross, the devil is in the details.

The fiscal cliff hostage situation, which commenced the day after President Obama won reelection, has now entered its seventh day. If Congress and the White House are unable to come to an agreement before Jan. 1, the Bush-era tax cuts on income, capital gains, and dividends will expire and revert to much higher levels, while automatic spending cuts will hit defense contractors and other Republican-friendly industries.

Congress

J. Scott Applewhite / AP Photo

While both sides clearly have something to gain from averting the fiscal cliff, President Obama essentially holds all the cards. If he refuses to engage, taxes on everybody—but especially the wealthy—will rise sharply and then Republicans will have to come ask for tax cuts. And so Republicans are starting to get antsy.

On Monday, we documented how Republican operatives and politicians were beginning to make overtures and concessions. Within the space of a few days, the official GOP position seems to have moved from “no increased revenues” to “increased revenues through eliminating deductions.” William Kristol, an outlier with no political authority, suggested that Republicans stop trying to shield people who make more than 1 million dollars annually from higher marginal tax rates.

You know you’re winning a negotiation when the opposite side keeps inching closer to your position while you continue to stake out a more maximalist approach. And that process continued on Tuesday.

Last week, Glenn Hubbard, dean of the Columbia Business School, was a key Romney adviser and a potential Federal Reserve chairman in waiting. This week, not so much. So this morning, Hubbard took to the Financial Times to offer his solution. And in a sign of how quickly things have changed, his first suggestion was to soak the rich. In his op-ed, Hubbard stuck to the current Republican position that we don’t need to raise marginal tax rates. Rather, he said, the U.S. can raise average tax rates by getting rid of the deductions that the rich use to such great effect. Such changes should be coupled with spending cut to take place over 10 years and long-term entitlement reforms.

At first blush, there’s not much new here. But you have to read between the lines to detect the nuance. To me, it is significant that Hubbard, perhaps the leading establishment GOP economic thinker, led with tax increases. (Typically, when they concede the need for more revenues, they do so only after describing the cuts necessary to bring the budget into balance.) Second, look at the way he talks about enhanced revenues. Not too long ago, GOP orthodoxy held that the problem with the tax code was that the poor and middle class didn’t pay enough taxes, and that the wealthy already paid too much. That’s out the window. “The first step is to raise average (not marginal) tax rates on upper-income taxpayers,” [my italics] Hubbard wrote. “This means closing loopholes.” He then cites with approval proposals to limit certain deductions for “upper-income households” and proposals to cap “the amount of deductions relative to a taxpayer’s income.”

Both the position and the rhetoric mark a significant shift from where Hubbard was a week ago.

CLIFF NOTES

Who’s Winning the ‘Fiscal Cliff’

Hint: it’s not the GOP. Daniel Gross on the latest jockeying over the looming round of tax hikes and spending cuts—and why Obama has the clear upper hand.

Last Tuesday night, the brutal, endless presidential election ended. Last Wednesday morning, what promises to be a shorter, but equally brutal, process began: the effort to stave off the collection of tax increases and spending cuts that are slated to take place on Jan. 1. Most analysts have viewed the upcoming fiscal cliff as a test of our governing capacity. I view it as a hostage situation.

Fiscal Cliff

Clockwise from top left: John Boehner; Barack Obama and Lindsey Graham. (AP Photo (2); Getty Images (bottom, left))

In a stunning role reversal, President Obama and his congressional allies are now holding the Bush-era tax rates on income and capital hostage, while the Republican Party struggles to figure out a ransom strategy.

In any negotiation, if you are the only party putting forth proposals, then you’re losing. And on Sunday, Day 5 of the hostage crisis, it was clear that the Republicans were beginning to break down.

Preelection, the Republican line on taxes was something like this: Bush tax cuts on capital, income, and estates should exist in their current form forever—no ifs, ands, or buts. Also, existing loopholes and deductions were generally fine. Any deficit reduction should be accomplished through spending cuts alone. In a primary debate, when asked if they would accept a deficit reduction deal that had $10 in every cut for every $1 in new taxes, every GOP candidate said that would be unacceptable. By presenting a united front during debt-ceiling negotiations, Republicans generally got what they wanted from President Obama during his first term. In August 2011, John Boehner crowed “I got 98 percent of what I wanted.”

That’s not likely to happen this time around. Sure, there was a certain amount of defiance from the likes of Senate Minority Leader Mitch McConnell. But a new talking point quickly emerged among the GOP. Maybe it is OK to have more revenues as part of a deficit-reduction deal—just as long as tax rates don’t rise. Instead, let’s curtail some deductions that rich people use to great effect. That was Boehner’s opening gambit earlier in the week. And it has been repeated by other Republican worthies.

Of course, this is a nonstarter for a host of reasons. This was Romney’s (losing) pitch during the campaign. And like Romney, the Republicans who advocate limiting deductions and closing loopholes in principle are not willing or able to list them in reality. Why? The big-ticket ones, like the deduction for charitable donations, or the deduction for home mortgage interest, are immensely popular and have powerful lobbying organizations behind them. Still, this is a significant step. Before entering negotiations, Republicans have conceded that more revenues are needed, and that they will have to come from having the wealthy pay more taxes than they do now.

A second breakdown in the façade came from Lindsey Graham, the Republican senator from South Carolina. On Sunday, Graham endorsed the Bowles-Simpson deficit-reduction framework and urged President Obama to do the same. Now, the Republican budget establishment had generally not approved of Bowles-Simpson plan when it was released. Rep. Paul Ryan, who on the commission, voted against it. Why? Ryan said it was because it didn’t cut spending on health care deeply enough. But the plan also foresaw the expiration of the Bush tax cuts and further tax reforms. Combined, as Suzy Khimm reported in The Washington Post, they would basically make Bowles-Simpson a deal in which every dollar in reduced spending was met by a dollar in increased revenue. Again, that is now Graham’s opening bid.

Blame to Go Around

Obama’s Fiscal Cliff Dive

The president invited members of Congress in to discuss how to avoid fiscal insolvency. He’s got his work cut out for him—and he’s partially to blame. James Warren reports.

President Obama asked key congressional leaders to visit the White House early next week in a bid to stave off the looming fiscal cliff. “I’m open to compromise. I’m open to new ideas. I’m committed to solving our fiscal challenges, but I refuse to accept any approach that isn’t balanced,” he said in remarks from the White House—his first public utterance since his wee-hours victory speech.

The president was hoping to capitalize on a good-will bump from his surprisingly strong reelection margin. But Obama will have his work cut out for him in selling his solutions to a recalcitrant Congress. And he’s partly to blame. While Republican obstructionism surely factors into the stalemates of the last term, Obama did little personally to reach out to Capitol Hill. Indeed, longtime Washington political observer Charlie Cook says Lyndon Johnson, famous for his intricate knowledge of Congress and his ability to work its levers at will, would be “spinning in his grave” at how little time and energy Obama has spent with members.

Consider this: Obama played golf 104 times during his first presidential term, according to CBS Radio’s Mark Knoller, a renowned keeper of White House miscellanea. But only three of those rounds have included any congressman; once with House Speaker John Boehner, twice with South Carolina’s Jim Clyburn.

President Obama speaks in the East Room of the White House on Nov. 9, saying "he's open to compromise."

Cook just listened to the 26 CDs comprising Robert Caro’s Passage to Power, the fourth volume of the epic biography of Johnson, a legendary dealmaker. He was struck by the contrast between the two presidents in engaging with congressional power brokers.

Obama “has to change the way he operates,” argues Cook. “The White House motto seems to be ‘No New Friends,’” his allusion to the small and tight group of mostly Chicago chums with whom the president and Michelle Obama socialize.

But even longtime Washington hands are unclear how the system will resolve what a prominent Republican lobbyist calls a “three-ring policy circus” of huge automatic spending cuts due to kick in on Jan. 1; a decision on whether to extend Bush-era tax cuts; and a decision next year on raising the debt ceiling. A longer recession and higher unemployment could be in the offing if there’s no resolution.

And it may be equally unclear whether a more overtly engaged Obama would alter the bargaining landscape, given underlying political frictions in both parties—and changes in the capital’s own political and social culture.

Not So Dire

Fiscal Cliff: No Deal? No Big Deal

When it comes to fixing the economy, Election Day changed nothing … and everything. Dan Gross reports.

With the election behind us, the financial-political complex now has another source of uncertainty to lose sleep over: the fiscal cliff. If Congress and the White House fail to come to terms by Jan. 1, 2013, taxes on income, dividends, and capital gains will soar to their pre-Bush levels—as they were originally designed to at the end of 2010. Meanwhile, a set of self-imposed automatic spending cuts will kick in simultaneously. If the spending cuts and tax increases last for a year, many analysts believe it would reduce economic growth enough to throw the economy back into recession.

This is dire stuff. And so before the election returns were even fully counted, the responsible parties began to posture and talk about the need for a deal—President Obama, Senate Majority Leader Harry Reid, and House Speaker John Boehner. Surely, this time Democrats and Republicans will be able to come together and reach a deal? I wouldn’t bet on it. But no deal may not be such a bad thing, either.

For much of the last two years, during the negotiations over the debt ceiling and budgets, there was a mismatch between the two negotiating parties. Simply put, there was no middle ground. President Obama badly wanted a large deal on deficits and taxes, in large part because he wanted to be seen as being able to govern a divided Washington. But Republicans were intent on denying him a deal for two reasons. One, they didn’t want to legitimize his presidency and make him look good by striking a deal. And two, even if they were in a mood to make a deal, asking congressional Republicans to sign off on a tax increase is like asking an Orthodox Jew to eat a lobster-and-bacon club sandwich on Saturday: it violates a host of taboos. When the Republican presidential candidates said at the debate that they wouldn’t accept a deal that cut 10 dollars in spending for every dollar in tax cuts, they really, really meant it.

Wall Street

A trader on the floor of the New York Stock Exchange looks at the front page of a newspaper the day after Pres. Barack Obama was reelected, Wednesday, Nov. 7, 2012, in New York. (Henny Ray Abrams / AP Photo)

As far as the fiscal cliff, this week’s election changed nothing—and it changed everything. It changed nothing because it preserved the status quo: a Democrat in the White House, a non-filibuster-proof Democratic majority in the Senate, and a Republican majority in the House. After the election, the parties simply restated their positions. Sen. Reid said they should start talking about a deal that must include higher taxes. House Majority Leader John Boehner said there could be no deal with higher tax rates, which left the door open for higher revenue through tax reform. Senate Minority Leader Mitch McConnell essentially said he wasn’t interested in a deal. For the past two years, every time Washington has set up a Deal or No Deal situation, it would have been smart to bet No Deal. And from this perspective, today is no different.

So how did the election change everything? Republicans essentially went all in on a Romney victory. They avoided making a deal and held out for the maximum gains that would ensue if Romney were to win—an extension of the Bush tax cuts, plus further tax rate reductions. But they lost. Big time. And come Jan. 1 they, and not President Obama, will be the supplicants. If no action is taken between now and Jan. 1, one could argue that it is the Republicans who will suffer the most. Yes, the middle class will suffer as the payroll tax cut expires, and many will pay a little more in income taxes. But as Mitt Romney so eloquently noted, lots of people don’t pay taxes on income. Rather, the wealthy will suffer disproportionately as they tumble over the fiscal cliff. They’ll see taxes on their income rise, as well as taxes on capital gains and dividends, and taxes on their estates. The hedge fund and private equity industry, which, thanks to the carried interest loophole, pays low long-term capital gain rates on its income, could face a doubling of tax rates. The billionaires who invested so much in ineffective anti-Obama ads (some of which ran in uncontested states like Texas and Connecticut) are going to be quite angry. Karl Rove took their money and delivered nothing—except for higher taxes. Meanwhile, Republicans will be hearing about the arbitrary budget cuts from defense contractors, hospital companies, and other businesses that rely on tax funds for their revenues.

Of course, President Obama doesn’t want to preside over big tax increases and arbitrary spending cuts. But with his last election behind him, he has a much greater capacity to weather economic pain than he did a year ago. And the cliff actually helps Obama achieve two stated goals: cutting the annual deficit and making the tax code more fair. The changes in policy that result from simply doing nothing will reduce next year’s budget deficit by several hundred billion dollars—more deficit reduction than any grand bargain would provide. The Congressional Budget Office says (PDF) the fiscal cliff would lead to $607 billion in deficit reduction in fiscal 2012 and fiscal 2013. (Take that, Bowles-Simpson!) And for the last several years, Obama has campaigned on the proposition that the wealthy should pay a higher share of their income in taxes. Come Jan. 1, they will.

Most significantly, the cliff will change the negotiating dynamic. After January 1, 2013, for the first time in several years, Republicans will desperately need and want something from the President. As CEOs, investors, and lobbyists wail, Republicans will only be able to deliver if they can coax President Obama into a deal. They can jump up and down and demand that Washington cut taxes on the very wealthy at a time of high budget deficits. And if Blackstone Group CEO Steve Schwartzman—who once compared the Obama administration to the Nazis, wants his low tax rate back—he can call the White House. Good luck with that. President Obama can counter with a more modest list of tax cuts that benefit the middle class. Or he can do what Republicans told him to do for much of Obama’s first term: tell your negotiating counterparty to go pound sand and come back with a better offer. At the bottom of the cliff, the rejectionist shoe will be on the left foot.

Battle

Who Wins a Fiscal Cliff Showdown?

Just how strong a hand would a re-elected Obama be playing?

Jonathan Chait thinks it's Obama:  

Here is how it will happen. On the morning of November 7, a reelected President Obama will do … nothing. For the next 53 days, nothing. And then, on January 1, 2013, we will all awake to a different, substantially more liberal country. The Bush tax cuts will have disappeared, restoring Clinton-era tax rates and flooding government coffers with revenue to fund its current operations for years to come. The military will be facing dire budget cuts that shake the military-industrial complex to its core. It will be a real-world approximation of the old liberal bumper-sticker fantasy in which schools have all the money they require and the Pentagon needs to hold a bake sale.

All this can come to pass because, while Obama has spent the last two years surrendering short-term policy concessions, he has been quietly hoarding a fortune in the equivalent of a political trust fund that comes due on the first of the year. At that point, he will reside in a political world he finds at most mildly uncomfortable and the Republicans consider a hellish dystopia. Then he’ll be ready to make a deal.  

He may well be right.  But let's consider a counterfactual: Republicans double down.  They let the defense cuts go through.  They refuse to compromise on tax cuts.  What happens next?  

I don't think Obama finds it "mildly uncomfortable".  I think he finds it more like "catastrophic".  Payroll taxes go up, and while people allegedly didn't really notice their paychecks getting bigger, I bet we see them getting smaller again.  The AMT kicks in, which doesn't immediately destroy the economy of states with high earners and high income taxes--New York, California, New Jersey, Connecticut, and Illinois--but certainly promises to do damage, and represents a fairly massive transfer to mostly Republican districts in places like Texas and Florida.  

It will also, of course, tank the economy.  This time, we'd have a short, sharp recession--but it would come on top of a long semi-recovery that has seen millions of people exit the labor force.  Who gets the blame?  Indisputably Obama, I think, though of course, he will go on the stump and lambaste Republicans for holding out on tax cuts.  But of course, the question can be turned around--if it's not that big a deal, why should Obama tank the economy over it?  But that's quibbling.  The general rule is, the guy in the White House, and by extension, his party, gets the blame.  

Obama's historical legacy becomes two terms of deep economic misery--with luck, he'd get to spend the last couple of years on the mend, after six years ranging from "completely awful" to "not really okay".  It would also pretty much end Democratic attempts to be seen as better on the economy, which have been making inroads thanks largely to the Clinton legacy, and the terrible final years of both Bush presidencies.  Again, that may not be fair, but the evidence seems to be that the public judges very crudely on "who's on office when the economy is good?", not sophisticated counterfactuals.  

One final thing: I think it's clear that there are some Republicans, particularly in the Senate, who would like to raise taxes. Not as much as the Democrats, to be sure, but these guys would like to compromise. They just can't vote for it, because they are too afraid of Grover Norquist.  A scenario in which taxes go up a lot, on everyone, and Obama gets the blame, while going down in history as the worst economic manager since Herbert Hoover, is not necessarily a nightmarish dystopia for them.  They, after all, have safe jobs and solid pensions--and it's the president's party that will be crushed at midterms.

In the Red

Congress Heads Toward Fiscal Cliff

With no serious budget negotiations underway in the House, Senate or White House, lawmakers are closing on a fiscal disaster, with no parachute in sight—and doing little more than arguing over blame.

Dick Cheney had a familiar message for House and Senate Republicans when he made a rare appearance on Capitol Hill this week: The cuts coming for the Defense Department at the end of the year are very, very bad.

But Cheney, who was the architect of the Pentagon’s war-time budget and a staunch supporter of the simultaneous Bush tax cuts, had no solutions to offer his GOP audience as they grasped for some way—any way—to undo the defense cuts that most of them agreed to last summer, all while vowing to preserve the Bush-era tax cuts that are set to expire at the end of the year.

Cheney Congress

Former Vice President Dick Cheney, who also served five terms as Wyoming's representative in the House, returns to the Capitol to meet with Senate Republican leaders at a political strategy luncheon, in Washington, Tuesday, July 17, 2012. He is accompanied by Sen. John Barrasso, R-Wyo., the Republican Policy Committee chairman. (J. Scott Applewhite / AP Photo)

Even for the former vice president, there are no easy answers for the mess that Democrats and Republicans have created for themselves by putting off decisions again and again about how to pay for the country’s boom-time budget in an era of high unemployment and gaping deficits. Unless Congress acts, a possible government shutdown, a debt-ceiling increase, $1.2 trillion in spending cuts (including $600 billion of cuts for defense), and $3 trillion of tax hikes will all hit in rapid succession over the next four and a half months.

But with no serious negotiations under way between the House, the Senate or the White House, Congress is barreling closer to the fiscal cliff that awaits the country, with no parachute in sight, and did little more this week than argue over who deserves more of the blame.

On Tuesday, Cheney moved quickly from a meeting with Senate Republicans to more meetings on the House side of the Capitol, at one point walking just feet behind Senate Majority Leader Harry Reid, who was standing before a gaggle of reporters guessing what Cheney had been talking about moments earlier.

“I’m sure the vice president is up here to spur them on to focus on how the defense industry is being hurt by the sequester,” Reid said.  “But they voted for it. Republicans voted for it.”

To Reid’s point, more than half the GOP caucus voted in favor of the worst-case scenario they now find themselves in, with potentially devastating defense cuts on the way, little leverage to force Democrats’ hands to extend all of the Bush tax cuts, and very little stomach for another bruising fight over the debt ceiling increase or a government shutdown that gave Congress its lowest-ever approval ratings the last time around.

Obama: U.S. Can't 'Cut Our Way To Prosperity'

After the House approved the Senate's fiscal cliff deal late Tuesday night, President Obama sent a message to the next Congress, arguing for a balanced approach to deficit reduction. And he was clear about his position on the coming debt ceiling debate. 'We can't not pay bills,' he said.

  1. Pelosi Waiting For House GOP Play

    Pelosi Waiting For House GOP

  2. Is Obama Failing on the Fiscal Cliff? Play

    Is Obama Failing on the Fiscal Cliff?

  3. Obama: GOP Has ‘Trouble Saying Yes’ Play

    Obama: GOP Has ‘Trouble Saying Yes’

Cliff Notes

Down to the Wire

Obama Wins Cliff Showdown

Obama Wins Cliff Showdown

But Howard Kurtz says it could prove a pyrrhic victory that could threaten his second-term agenda.

Debate

Terms of Disagreement

What Do They Want?!

What Do They Want?!

Abby Haglage peeks at the fiscal-cliff wish lists of Obama, Pelosi, Boehner, and more.

Laughable

The Aftermath

Congress’s Cliff Chaos

Congress’s Cliff Chaos

It was an ugly scramble—and leaves us facing yet another fiscal showdown before spring, says John Avlon.

History

Past as Prologue

A Confederacy of Madmen

A Confederacy of Madmen

The president’s budget battle is really a fight with 200 years of obstructionism and selfish greed. By Michael Tomasky.

FAQ

Your Questions Answered

Fiscal Cliff for Dummies

Fiscal Cliff for Dummies

Impress the relatives with tidbits from our guide on everything from the sequester to the supercommittee.

Not Surprising

Ineffective Government

Our Pathetic Congress

Our Pathetic Congress

John Avlon on how our government turned to self-sabotage.

Entitled

Fix Entitlements, Voters Say

Fix Entitlements, Voters Say

New polls shows that voters are ahead of politicians in understanding the necessity of reforming entitlement programs, writes Eleanor Clift.

Bipartisan Deal

Democrats Must Step Up

Fiscal Cliff

Don’t Back Down, Obama!

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