What Is Going On (I Think)

I just was asked an eminently logical question:  The President and the Speaker were so close to a deal.  The differences in their numbers for revenues and spending cuts were small.  Divided by ten (for the ten years likely to be covered by any deal), they were even smaller.  Why have the talks taken the current apparent turn onto a siding that by all appearances is a dead end?  Why can’t they get to yes?  Here is my try at an answer.

From the most optimistic perspective:  The President and the Speaker are figuratively negotiating in a closed room, on behalf of the members of their respective political bases who are waiting outside.  To achieve any form of agreement, the President and the Speaker must compromise their positions.  But to satisfy their political bases that the compromise is the best deal possible, the principals must negotiate right up to (or beyond) the deadline, and then walk out of the room with blood on their brows.  (People who have negotiated trade agreements have told me that the bargaining always runs beyond the deadline, as much for this reason as for any substantive issues that might arise.)  If this is the operative consideration, then expect the room to remain closed for some time, possibly into January, before the exhausted and battered negotiators come from the room to declare “victory” to their inevitably unhappy, but hopefully marginally satisfied, troops.

An unfortunate aspect of this “fiscal cliff” is that the putative deadline of January 1, 2013 is already too late on several counts.  The financial markets are nervous about these painful negotiations – and on several other scores.  All of the financial and business maneuvering that you read about in the press amounts to purchases of insurance against Washington malfeasance (or nonfeasance).  Why couldn’t Washington just do its job – right – and save the economy and the taxpayers all of that wasted money and effort?  The Internal Revenue Service should have had certainty on the parameters of the individual alternative minimum tax (AMT) and on the basic withholding rates at least one month ago, and the coming filing season is already foreordained to a delayed and inefficient start.  But a sad consequence of our polarized society is that politics takes precedence, and so the room remains closed, and the issues remain unresolved.

But that is the optimistic interpretation, in which we are stumbling ungracefully towards a deal.  Another interpretation, equally consistent with the facts, is more troubling.  The members of the respective political bases outside the room include representatives of political extremes that do not want any form of compromise.  The two extremes both believe that they hold the trump cards in this game.  Some Democrats think that Republicans can be brought to their knees by the expiration of the upper-income tax cuts and the across-the-board spending cut for the Pentagon.  To be sure, the Democrats will suffer collateral damage; the tax cuts will expire for everyone, and non-defense spending (including entitlements, to a limited degree) will be cut.  But on balance, some Democrats believe that they would win a game of chicken played on the edge (or even over the edge) of the fiscal cliff.

However, there are some Republicans who believe that they would have the last laugh.  Early in 2013, the Secretary of the Treasury will run out of borrowing authority, when the debt hits its statutory limit.  So those Republicans believe that they can wait just a little bit longer, and they will have the Democrats right where they want them.

Meanwhile, by most indications, the President and the Speaker appreciate the risks entailed by a run off of the fiscal cliff, and understand that a prudent person would not run those risks.  However, the extremes of their respective political bases probably do not share the full measure of that awareness.  The President and the Speaker are counseled or confronted by the most savvy minds of the economic and financial professions.  In contrast, some extreme Members of Congress, and virtually all of the extreme party members in the hinterlands, likely rely more on the Internet echo chamber, where they can find many strident voices that validate imprudent fiscal behavior.  So the President and Speaker see the importance of avoiding the cliff much more clearly than many of the members of their respective bases.

But the President and the Speaker are constrained by their constituencies.  An agreement between the President and the Speaker is worthless if it cannot pass muster with a majority vote in the House, and 60 votes in the Senate.  Both Republicans and Democrats in both the House and the Senate have drawn their lines in the rapidly drying concrete over provisions that they have seen in the putative offers of the President and the Speaker – either tax increases, or the use of the slower-rising chain-weighted CPI for indexation of Social Security and other benefit programs.

There is a significant downside for both of these negotiators.  The Speaker faces re-election by his caucus next year, and prominent conservative Members and groups are bad-mouthing his proposed deal.  Surely, the Speaker would like to keep his position.  But beyond that, if he believes that it is essential to avoid the cliff and achieve a compromise budget solution, losing the speakership to someone who does not share those goals would be retrograde.  On the other side, the President cannot be unseated, but he can be disempowered.  A perceived rebuke by the President’s own base could doom any second-term agenda even before that term is begun.  These personal defeats would be painful enough if they were part of a legislative victory; but they would be even worse if the two negotiators risked their political positions for a bill and a cause that went down.

The President and the Speaker already have come a long way from the extremes of their bases, on Social Security and on taxes.  The distance remaining between them is small, in the greater scheme of things.  But we do not yet know whether even their current offers – which have not yet met in the middle – would be accepted by their political bases.  So while a further move for them is politically risky, they may already have stepped off of their own political cliffs.

So it is easily conceivable that the partisan chains that constrain the President and the Speaker do not allow them the reach they need to meet in the middle, however close they appear today.  What will happen?  Stay tuned.

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