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.

All of which is not to say that Obama has no leverage. To state the obvious, Republicans like lower taxes. A lot. They are not looking forward to the fiscal cliff.

But I don't think that the leverage is as strong as Chait implies. It's more like they both have a gun pointed at each other's head--if one gun goes off, both parties almost certainly end up grievously wounded.