Surprise, surprise. Democrats and Republicans are stalemated in talks to avoid tax hikes and spending cuts that will begin to kick in January. On Sunday, House Speaker John Boehner told Fox News, “We’re nowhere.” Top White House adviser Gene Sperling told Bloomberg, “It’s for [Republicans] now to come forward with their plan.” There will be moments of hope between now and the end of the year, no doubt, but long-time Washington budget experts think the chances of a resolution to the impasse are receding to the spring at the earliest.
What unseen forces are compelling Washington’s leaders to jump off the so-called fiscal cliff like so many lemmings, those Arctic rodents known for supposedly committing suicide in mindless droves by leaping en masse into the frigid ocean?
First, the political incentives behind stalemate have become more acute in the year and a half since talks last broke down, not less. On the president’s side, he won the November election arguing that we should solve the budget mess in part by raising tax rates on the wealthiest Americans. By the end of the week, senior White House officials were explicitly insisting on higher rates as part of a deal. On the Republican side, every GOP House member who was elected for the next Congress ran against raising tax rates and thinks they won on the issue too; they have been equally absolute that they won’t raise rates.
In that battle, the President rightly feels he has the upper hand: the fiscal cliff itself was set up to give the him an advantage when it was passed in August 2011. At the time it was seen as a big win for the Tea Party in that the fiscal hawks got the threat of $1.2 trillion in spending cuts over ten years, beginning Jan. 2, 2013. But while defense cuts will be made across the board, something Republicans have been eager to avoid, 47 specific social programs for the poor are exempt from the cuts, as is Medicaid, shielding some Democratic interests from at least some of the hit. Obama has a political advantage, too. He has said he’ll sign a bill, already passed by the Senate, that would protect all but the richest 2% in the country from income tax hikes, if only the GOP House will pass it.
Unfortunately, Obama’s advantage won’t force an early end to the impasse. That’s because Republican insistence that they will not raise any tax rates makes sense when you see how the picture changes for them in the new year. When everyone’s tax rates are poised to go up next year, GOP House members can agree to marginal rates for the rich that would have been a tax hike in December, but are lower than the newly reinstated Clinton-era rates. The same deal that would make them pledge-breaking tax hikers now will make them tax-cutting heroes after the deadline.
What of the ominous Dec. 31 drop, the catastrophic fall that comes with the cliff? If nothing is done all year in 2013 the damage will be real, likely causing a new recession. But for all the talk of an imminent crisis, there are ways the administration can ameliorate the short-term effects of the deadline. First, to prevent companies from cutting paychecks as they withhold income at January’s higher tax rates, the Treasury can tinker with its withholding formulas to push some of the draw-downs past April, by which time they may hope to have a deal. The White House can also avoid some early pain from the $500 million in spending cuts mandated by sequestration through apportionment, also delaying the pain until later.
So maybe Washington’s politicians (and those of us following them) aren’t mindless cliff-jumping rodents after all? Sorry. Scientists have known for decades that the little hamster-like creatures don’t commit mass suicide. The Academy Award winning Disney documentary that led to widespread acceptance of that myth in the 1950s was fabricated. The danger for Americans, however, is very real. Lemmings do die in mass migrations every few years, but it’s not the jump that kills them: it’s the long, slow slog that follows.