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To Avert a Fiscal-Cliff Catastrophe, Someone Has to Blink To Avert a Fiscal-Cliff Catastrophe, Someone Has to Blink

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Magazine

ELECTION 2012: THE LAME DUCK

To Avert a Fiscal-Cliff Catastrophe, Someone Has to Blink

Can either party be convinced that there is a difference between a lame-duck surrender and a lame-duck compromise? Probably not.

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(illustration: paul slater; represented by bernstein & andriulli)

President Obama has been awfully consistent. Since 2008, before he was elected president, he has vowed to help pay down the deficit by taxing the wealthiest Americans. Even the language remains the same. “It is true that my friend and supporter Warren Buffett, for example, could afford to pay a little more,” Obama said during a 2008 debate against his Republican challenger, John McCain.

Then it was one among many policy proposals. This time, it became the centerpiece of his fiscal plan, in a race dominated by the fiscal crisis and the recession’s aftermath. Obama’s reelection campaign argued that the rich should pay a greater share of taxes and that the Bush-era cuts should expire for the top 2 percent of earners. Exit polling from Tuesday’s election shows that a majority of voters agreed with Obama: 60 percent supported the idea of higher taxes on household income above $250,000.

 

Now that Obama’s last election is behind him, he is unlikely to change his mind. “For the president and the administration, this represents a red line,” says David Kamin, the president’s former special assistant for economic policy who is now a professor at the New York University School of Law. A balanced deficit-reduction package—one that does not eviscerate domestic programs—demands new revenue, so “the administration is going to do all it can to hang tough.”

But Republicans famously revile new taxes. While some GOP members of Congress say they’re open to new revenue, few—if any—say it should come from higher income-tax rates. And they are surely just as adamant as the president.

Both parties pledge that they don’t want to plunge from the fiscal cliff—the more than $500 billion in automatic tax hikes and spending cuts scheduled to kick in with the new year. The tax changes alone would affect roughly 90 percent of Americans, according to the nonpartisan Tax Policy Center.

 

But to avert catastrophe, someone needs to blink.

Since Tuesday, the two parties have been acting conciliatory (even if Obama’s victory gives him a great deal of leverage over Republicans who really don’t want the tax cuts to expire). House Speaker John Boehner and Senate Majority Leader Harry Reid talked on Wednesday about the need to cut a deal. “It’s better to dance than to fight,” as Reid put it. But besides the happy talk, it’s not clear what, if anything, the election has changed. “We have the same cast of characters. We have the same problems. Are we going to get a different result?” asks Douglas Holtz-Eakin, the former director of the Congressional Budget Office and now president of the conservative American Action Forum.

A different result means a large-scale compromise, and that’s one possibility for the lame duck. It is exceedingly remote. Observers think a smaller-scale compromise, however, might be within reach. The administration and Congress could come up with the framework for a deal—with specific targets—that temporarily avoids the sequester, extends the majority of the Bush-era tax cuts, and promises to tackle a grand bargain, as well as tax reform, in 2013. “The key resides in both parties understanding the difference between surrender and principled compromise,” Holtz-Eakin says.

So far, the parties have not acquired that understanding. That’s why another scenario may be more likely: a swan dive off the fiscal cliff after weeks of negotiations and tense wrangling. This would rattle the financial markets and vex a business community already horrified by political brinkmanship. But it would also give the two parties a new starting point for negotiations. Democrats could agree to some Medicare changes in return for additional revenue and higher rates on either individual or investment income; Republicans could negotiate upward the definition of “upper earner” and realize a historic entitlement reduction. That way, they could each say they had gotten what they wanted.

 

Until then, say experts, neither party may be able to declare victory. Obama has been on the record for four years insisting on a “balanced” solution, and Republicans have tax cuts written into their party’s DNA. How could the players see a difference between surrender and principled compromise when there may be none?

THE FRAMEWORK

Agreeing on the elusive “grand bargain”—or at least the contours of one—is the best-case scenario. It would allow Congress and the administration to reassure financial markets and the business community that they can work together. It would give lawmakers more time to delve into the details of tax policy, spending, and health care in a more meaningful way. Most significantly, it would not plunge the U.S. economy back into a recession. CBO estimates that going over the cliff would slow economic growth to 0.5 percent, while extending the tax cuts and deferring sequestration would lead to 4.4 percent growth.

This article appears in the November 10, 2012 edition of National Journal Magazine.

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