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.
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.
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.
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.
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.
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.
But Howard Kurtz says it could prove a pyrrhic victory that could threaten his second-term agenda.
Abby Haglage peeks at the fiscal-cliff wish lists of Obama, Pelosi, Boehner, and more.
It was an ugly scramble—and leaves us facing yet another fiscal showdown before spring, says John Avlon.
The president’s budget battle is really a fight with 200 years of obstructionism and selfish greed. By Michael Tomasky.
Impress the relatives with tidbits from our guide on everything from the sequester to the supercommittee.
John Avlon on how our government turned to self-sabotage.
New polls shows that voters are ahead of politicians in understanding the necessity of reforming entitlement programs, writes Eleanor Clift.