Financial cliff hard place to compromise
Wednesday, November 21, 2012 12:00 PM
WASHINGTON - Fresh off his re-election, President Barack Obama enters the coming budget negotiations with some clear advantages. Voters have just ratified his broad agenda. And the specific mixture of spending cuts and tax increases set to take effect on Jan. 1, unless the two parties can reach a deal, is far more consistent with Obama's preferred long-term policies than with the Republican version. The status quo favors Democrats.
Yet the president also comes into the talks with a couple of important disadvantages that are easy to miss amid his post-election glow. He and his congressional allies began their efforts to reduce those disadvantages in recent days, and they will spend much of the next few weeks of negotiating and posturing continuing to do so.
Crucially, nobody yet knows whether Obama is willing to go over the so-called fiscal cliff and allow the scheduled changes - the end of all the Bush tax cuts and the temporary tax cuts from Obama stimulus bills, as well as cuts to military and domestic programs - to take effect. If they were to take effect, the economy could fall into recession next year, economists say. But if Republicans believe that Obama does not consider failure to be an option, as was the case during the debt-ceiling talks in 2011, they have little incentive to compromise.
Almost as important, the closest thing to a framework for a big deficit agreement has more for Republicans to like than for Democrats. Obama was so eager to reach a deal with congressional Republicans in 2011 that he agreed to the outline of a plan that made many Democrats cringe. It was well to the political right - with fewer tax increases, fewer military cuts and more cuts to Medicare and Social Security - of the bipartisan plan released by the Bowles-Simpson commission in 2010.
Obama was mostly quiet last week, reiterating on Friday that he wanted a "balanced approach." But congressional Democrats were already sending signals that Obama should - and would - allow the scheduled changes to take effect on Jan. 1 if need be. The Democrats were also making the case that the election's outcome had wiped away the relevance of the 2011 framework.
"It's not like this was some sort of side issue during the campaign," Rep. Chris Van Hollen of Maryland, a top House Democrat, said last week. Obama promised to raise tax rates on high earners, and Mitt Romney vowed not to. "The president won that argument," Van Hollen said.
The fight is likely to be one of the most consequential of Obama's second term (even if it technically takes place in his first term). With the Republicans in control of the House, Obama will probably not be able to pass any sweeping new legislation - say, on climate change - in the next four years, as he did on health care in 2010. He can instead cement the accomplishments of his first term and look for medium-size victories, like an immigration overhaul or increased funding for alternative-energy research.
And, thanks to the fiscal cliff, he will have a chance to shape the federal budget for years to come.
If he can persuade the Republicans to increase taxes on the affluent and leave them low on the middle class and poor, he will take a step toward reducing economic inequality.
Those tax increases, combined with more military cuts than Republicans favor, would also leave the federal government with money to spend on education, scientific research, clean energy, roads and mass transit, all of which Obama calls crucial to the economy of the future.
Perhaps his strongest weapon in the debate is that Americans mostly agree with him on these issues - in greater numbers, in fact, than they voted for him Nov. 6. Polls generally show that strong majorities support higher taxes on the affluent and more spending on a handful of tangible domestic programs, like schools and infrastructure.
"What I hope the White House does is take this case outside the Beltway to the country," Sen. Michael Bennet, D-Colo., told me. Sen. Charles E. Schumer of New York, the third-ranking Democrat in the Senate, added that he thought the election - both the outcome and the exit polls - had two mandates. "One was for both sides to come together," Schumer said. "Two was to raise taxes on the wealthy."
Higher taxes on the affluent cannot solve the long-term deficit, which is foremost a product of rising health costs. But higher taxes can make a significant dent over the next decade. That is in part because upper-end taxes have fallen so much over the past 30 years.
Many budget analysts have called for about $500 billion in annual deficit reduction by 2020. The expiration of the Bush tax cuts on income above $250,000 would cut $110 billion. Other tax changes that many Democrats favor, like restricting some loopholes for high-end taxpayers, could add another $50 billion to $100 billion. Spending cuts and tax increases on the middle class or poor would still be necessary, but many fewer of them than if taxes do not change.
For now, Republicans have signaled some openness to accepting higher taxes. But they and the Democrats remain far apart, on both the overall size and the composition of a tax agreement. (Republicans say they will accept only the closing of loopholes, not the higher rates that would come from the expiration of the Bush tax cuts on upper income.)
Given the administration's repeated failure to win over Republicans in its first term, Obama advisers have been talking for weeks about whether he could stand firm and allow the scheduled changes to take effect Jan. 1. Doing so might hurt a still-vulnerable economy, by leaving consumers with less money and reducing government spending. The reaction from markets may aggravate the situation.
But going over the so-called cliff also has the potential to be less bad than feared. It would be a slow accumulation of economic changes and not entirely unexpected, which is very different from defaulting on the country's debt payments, as nearly happened during the 2011 debt-ceiling talks. Democrats have begun making this point more loudly, in part to send the message that they are willing to accept the scheduled budget changes if need be.
"For the president to have any leverage, he has to make the Republicans believe he is willing to let the tax cuts expire," said James R. Horney of the Center on Budget and Policy Priorities, which has close ties to the White House and congressional Democrats.
"The only way, I suspect, that he can convince them he is willing to let that happen is to actually let it happen."
Republicans, having absorbed defeat and seen the polls showing that Americans consider their party less willing to compromise than Obama, may well decide to do so before Jan. 1.
House leaders spoke of compromise last week. But betting on an unexpectedly smooth bipartisan deal generally hasn't been the smart move lately.