The so-called fiscal cliff is one of those rare issues where everyone has an incentive to predict the worst. Barack Obama thinks it will force Republicans to accept higher taxes on the rich, Republicans think they can back him into a corner and force him to cave to their demands as they did two years ago, and businesses and consumers are wary that the still-fragile economy may take a nosedive. Figuring out how this will play out is Washington’s favorite parlor game right now, so let’s play.
Starting with Obama, he is obviously coming off a very sweet election victory. Although Republicans are doing their best to diminish its significance, the fact that he won two victories in a row with better than 50 percent of the total vote puts him in elite company. In the postwar era, only Dwight Eisenhower and Ronald Reagan accomplished that feat. And the fact that Democrats picked up seats in the Senate, when they were expected to lose net seats, is icing on the cake. Democrats even got a slight majority of all votes for the House, even though they failed to retake control due to gerrymandering by Republican state legislatures.
Obama knows that his record of accomplishment on the budget is thin. He was hamstrung by the economy’s weakness and implacable GOP opposition and totally caved to Republican demands and simply extended the Bush tax cuts for two years in 2010 without making any real effort to let those at the top expire, as he had demanded.
I thought that was the right decision given the political and economic circumstances. But there’s no question that Obama paid a price for showing weakness in the face of his enemy. It encouraged Republicans to double-down on their opposition to anything Obama proposed – even when they agreed with it.
Thus in the Summer of 2011, Republicans refused to raise the nation’s debt limit, creating a financial crisis that still haunts financial markets. They were close to negotiating a deal for $800 billion in revenue increases in exchange for deep spending cuts when a parallel effort by a group of Senators called “The Gang of Six” upped the ante. Obama endorsed the new, much higher revenue plan of $1.2 trillion and Republicans walked away.
Instead, Republicans accepted “sequestration” – automatic spending cuts of $1.2 trillion divided equally between domestic and defense programs. The number of congressional Republicans willing to actually accept even a penny of defense cuts can probably be counted on one hand; they just assumed that a congressional super committee would come up with alternative spending cuts that made more sense than the meat-ax approach that was enacted into law.
But the super committee collapsed because, once again, Republicans remained subservient to their ultra-wealth contributors and refused to accept even a penny of tax increase. They also knew that every single candidate running for the Republican presidential nomination had rejected $10 of spending cuts for $1 of tax increase at a debate in Iowa.
So now a major part of the fiscal cliff is a spending sequestration that Republicans enacted as their price for raising the debt limit and that many now desperately want to reverse, but can’t say so for fear of looking like complete fools. Ever since the day Obama took office, they have said that government spending inhibits economic growth and spending cuts are stimulative, but faced with the reality of actual spending cuts Republicans backtracked in full retreat.