Showdown at the Fiscal Cliff

Nobody sings the song of cooperation more sweetly than President Obama. But singing is a performance art, and this president is performing now.

At the end of the year, the Bush tax cuts expire. So does the payroll-tax holiday. Automatic spending cuts begin to bite. These preplanned events are known together as the “fiscal cliff.”

How menacing is the fiscal cliff? Opinions differ. But here’s a fact there’s no differing over: Republicans are a lot more frightened of the fiscal cliff than Democrats.

That fact empowers President Obama. There’s a saying, often attributed to Al Capone: “You get more with a kind word and a gun than with a kind word alone.” The president has a gun in his hand. Avoiding a tumble over the fiscal cliff will require new rules signed by the president. If he doesn’t sign, over we go.

The president has announced the price of his signature: Republicans must agree to tax increases on the wealthiest Americans. The reading eye tends to focus on the second half of that sentence: tax increases on the wealthiest Americans. It is, however, the first half of the sentence that carries the most potent political implications: Republicans must agree.

The president’s most basic goal in these fiscal negotiations is not to extract more revenue from upper--income Americans, although obviously he’d like to do that too. His most basic goal is to force Republicans to forswear their famous no-new-taxes pledge.

That pledge is the tie that binds Republicans in Congress and Republicans in the country. Compel Republicans to recant that commitment and Republican unity suddenly dissolves. The discipline of their congressional caucus will break. Their base will rebel. Their leaders will quarrel with each other.

If a breach will so shock the Republican Party, why would Republicans ever agree to it? Here’s where the president brandishes his gun—and his kind word.

During the election campaign, the president called for a tax increase on incomes over $250,000. As soon as he had gained reelection, however, he explained that he was not “wedded” to his number. Other Democrats have suggested a figure of $500,000. Sen. Chuck Schumer of New York has raised the bidding to $1 million.

The president has proposed to balance the tax increase with spending cuts. In what ratio? His first postelection offer was stingy to Republicans. But he is not wedded to that part of his program either. Expect him to top up that part of the offer as well.

The negotiating strategy will become plainer and plainer: (1) take advantage of the fact that Republicans now want a fiscal deal more than Democrats do; (2) set as the price of the deal a Republican surrender on the no-tax pledge; (3) enhance the presidential quid pro quo step by step until Republican resistance cracks.

The fault lines on which the Republicans might crack are already visible. Some Republicans are much more frightened of the impending rise in the capital-gains tax than of the scheduled rise in federal personal-income taxes. Meanwhile, other Republicans whose businesses depend on consumer spending worry about the expiration of the payroll-tax holiday and the ensuing jolt to consumer incomes. Divide and conquer will be the strategy of the day.

What’s the Republican counterplan?

First, realize how much bluff is in the president’s position. The risk is real that the fiscal-cliff crisis could shock the economy—and it’s the president whom voters hold responsible for economic performance. President Obama won reelection by taking credit for the slow but real recovery since 2009. He won’t want to face recession in 2013.

Second, counter the president’s seemingly reasonable offers with genuinely fair offers of one’s own. The whole sequester nightmare exists only because Republicans demanded it as the price of raising the debt ceiling in 2011. Offer to get rid of it. Offer to extend the payroll-tax holiday. Stress what you will do, not what you won’t do.

Third, play for time. The president will never again be stronger than he is this month. The later into his presidency this deal is done, the better deal Republicans will get. And so long as the world will lend the United States government 10-year money at 1.6 percent, why the rush to balance the budget now? The job will be easier after we return to normal output than it is today. When you’ve got a big job ahead, sometimes the boldest move is to stall.

David Frum is the author of the Newsweek eBook Why Romney Lost (And What the GOP Can Do About It).