Monday, November 12, 2012

The Republican's Fiscal Cliff

There's a very interesting theory going around about how President Obama is playing his cards when it comes to the so-called fiscal cliff, when automatic spending cuts in the federal budget are set to kick in. The theory is that Obama intends to let the January 1 deadline come and go without reaching agreement with the Republicans over legislation to prevent the automatic cuts, because if the deadline passes with no agreement being reached he will be in a much stronger position than they are and can force them into a resolution of his choosing.

Obama will be in a stronger position for two basic reasons. One is that if the cuts take place, including huge cuts in defense spending that Republicans abhor, Republicans will be in a position of having to negotiate increased defense spending. The other is that with no agreement in place, the Bush era tax cuts will also expire, so Republicans will have to try to negotiate getting those restored at the same time as they want to increase spending.

I'd heard this theory laid out someplace but couldn't remember where, then tonight came across some articles by Jonathan Chait of New York Magazine that lay out the entire strategy. The latest was written after Obama's address this week from the White House, in which, Chait writes, Obama said things that could only be intended to advance this strategy.

The fiscal cliff is the result of legislation passed last summer when Obama and the Republican led House were fighting over the terms of raising the debt ceiling limit, which had to be raised to prevent the government from going into default. That would have ruined its credit, or bond rating. In return for agreeing to raise the debt ceiling, Republicans made Obama agree to deep cuts in the deficit.

Since the deadline for raising the debt ceiling was imminent there was not time to negotiate specific cuts, and the bi-partisan "Super Committee" was set up to do that. It failed to do so, and the agreement stipulated that if that happened, there would be across the board cuts to everything in government, including defense spending.

Obama wants the cuts to take effect, Chaint says, because the Bush era tax cuts, although they are not part of the legislation Obama agreed to with congress, expire at the same time as the massive budget cuts start to kick in, January 1. Republicans are dead set against letting those tax cuts expire, and expected to use the fiscal cliff as leverage to force their renewal.

But if the Bush tax cuts expires, OPbama will have the increased taxes on the rich he wants, and will have all the revenue he needs to pay for the social programs he wants. Republicans will be left in the position of having to negotiate increases in defense spending, and negotiating new legislation to lower taxes on the rich to ere they are now, both at the same time. Obama will hold all the cards. Some of the more astute Republicans are beginning to realize the trap they set for themselves, and are signaling that they will go along with raising taxes in the rich, Chait says.

The very idea of a fiscal cliff is a misnomer, Chait says. Nothing will happen on January 1. The cuts will take place over time, and Obama, as president, has ways of delaying them if he wants to. Any cuts can be prevented with legislation from congress -- legislation that, practically speaking, would result from negotiations between congress and Obama, and Obama will be negotiating from the much stronger position.

A media frenzy has already begun to take shape, led by a panicky Wall Street Journal editorial board, saying that the fiscal cliff will be a disaster for the country. The frenzy will intensify as January 1 deadline looms, and is being fueled by lobbyists for the defense industry, which faces a 20 percent reduction in income with the automatic budget cuts. It's also being fueled by Washington insiders who have a fetish about bipartisanship, who think the people shouldn't interfere with government and that the professional politicians should sit down at their clubs and work things out amongst themselves.

The caveat, Chait says, is that Obama will come under so much pressure to cut a deal that he will cave in. The bulk of the media will be pressuring him, as will the business community led by the defense industry. Contributing to a caving in scenario is Obama's proclivity for wanting to compromise.

Working against Obama buckling will be the mood of the electorate, which was expressed in the election results -- Obama, as the campaign wound down, had made raising taxes on the rich a major part of his campaign.

So far, as evidenced by his opening remarks in his White House address, Obama is sticking to his plan, and to his guns, Chait says. But stay tuned.

Chait began writing about this before the election, and also talks about what Romeny's plans were for dealing with the "fiscal cliff." Republicans had planned to use it to implement the draconian Ryan Budget, which would have lowered taxes on the rich even more than the Bush tax cuts did, and would have made huge cuts to social programs for the poor. The Ryan Budget is like the austerity measures being forced on European governments by their creditors, which are causing much pain and hardship and which have pushed the Eurozone back into recession.

Chait really lays this all out pretty thoroughly and it's really interesting reading. He has been thinking and writing about this since well before the election and has been studying every move by both sides. Here are links to three articles. The first is long but lays out Obama's entire strategy and the events that led to it. The second two are relatively brief updates.

10/14/12  November 7: Though their agendas are hidden, both Romney and Obama have plans to dramatically remake the size and character of American government. Very, very quickly.

11/1/12 There Is No Fiscal Cliff

11/9/12 Obama To Boehner: Put Down The Gun
 
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