Monday, November 12, 2012

President Obama and the fiscal cliff

A bad metaphor has caused everybody to think about the fiscal cliff the wrong way

Jonathan Chait wrote this for New York magazine on October 14:
 
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.

Leading up to the New Year, there will be a concerted effort to preempt this policy shift by bringing the two parties together to consummate a version of the endlessly touted (but little-understood) Bowles-Simpson agreement that GOP House members rejected. This is already under way, and is being described in the press as a noble bipartisan effort to avoid something terrible. But it is more accurately understood to be a conservative attempt to avoid a massive shift in leverage in Obama’s favor. Some Democrats get this. (Charles Schumer is one of the few willing to take a hard-ass line against Bowles-Simpson). I also believe that, despite his silence on the matter, Obama gets it, too...
 
The effect of this[debt ceiling crisis] episode seems somewhat akin to the punch to the jaw Michael Corleone took from the corrupt police officer Captain McCluskey. Obama stopped constructing his strategy around the premise that he could win Republican support—which is to say, he stopped trying to pass laws through Congress. In September, he unveiled his classically Keynesian jobs plan of public investment and middle-class tax cuts knowing full well Republicans would reject it.

In December, he delivered an address in Osawatomie, Kansas, laying out his vision of government, which was largely an argument against the Republican anti-tax jihad. Low taxes for the rich, he argued, had made the country less equal without making it more prosperous and starved the public sector of investments needed to help spread economic opportunity...

Obama may have abandoned his attempts at progress through compromise, but he is pursuing progress through other means. Administration officials no longer say that they can cajole Republicans into agreeing to raise tax revenue through negotiation. Instead, they understand something important, something that has not quite sunk in with wary liberals, obstinate conservatives, or split-the-difference deficit scolds: They no longer have to...
 
What really lured Republicans into a trap was the timing of the arrangement. The beginning of 2013, when the automatic spending cuts take effect, coincides with the expiration of every penny of the Bush tax cuts. And so, by postponing the fiscal reckoning, Republicans inadvertently scheduled it for the very moment when Obama (should he win reelection) will hold his maximum leverage. Last summer, Obama was pleading with Boehner to give him $800 billion in additional revenue. Come January, he’ll have $5 trillion in higher revenue without doing anything...
 
But if Obama wins, starting on January 1, everything that has held true in Washington for the past two years flips upside down. Even tax reform, which the two parties have endlessly discussed but failed to agree on, will suddenly become very easy, because instead of using reform to make people pay more, any new reform will tax people less...
 
Here is a case where a bad metaphor has caused everybody to think about the matter in exactly the wrong way. When you walk off a cliff, the first step is your last. There is no such thing as falling halfway down a cliff. But the “fiscal cliff” is not a cliff at all.The economic damage is cumulative. It is the opposite of the debt ceiling, when the doomsday clock ticked down to a moment of sudden calamity.
 
A full year of inaction would do a lot of damage, but a week, a month, or even a couple of months would not. The president would have enough control over the mechanics of the budget to delay the effects of higher taxes and spending cuts in order to cushion the blow to the economy. Even if the tax hikes and spending cuts go into effect, any deal that gets signed later could be retroactive.Meanwhile, the Federal Reserve could also take emergency action to keep the recovery afloat...

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