Negotiating Towards the Cliff

As someone who predicted a month ago that we would go over the “fiscal cliff”, and also that the debt ceiling introduction would complicate the negotiations you might expect that after yesterdays rhetoric I would be here saying I told you so. But yesterdays tough day for negotiations does not have to mean driving over the cliff. The President is being criticized for submitting a one sided offer, but it is an opening offer that will require some work by both sides.

I still believe that the President wants a deal, and it is in the country’s best interest that we have one. A drive off the cliff which was not corrected in the first weeks of January would ultimately throw the country back into recession, with some estimates of negative GDP growth of 4%. That is a big hit. So what is really going on in Washington?

Democrats who see total leverage for the President are only looking at the issue of the top tax rate rising. On that score they are correct. That rate is going up no matter what. The question now comes on all of the other important items that are being dealt with through these negotiations. Alternative Minimum Tax, the Debt Ceiling, the Capital Gains Tax Rate, the sequester, (and especially for Republicans the defense sequester). On these items, and especially on the debt ceiling, the Republicans have significantly more leverage than they do on the issue of the Bush Tax Cuts. While both sides posture the hard liners advocate burning down the house. Ultimately the deal, if made, will likely enrage the base of each side. So where do we go from here?

The President’s initial offer now requires a Republican counter-offer. Lets face facts. The President cannot negotiate with himself, especially on cuts to entitlements. The Republicans are the ones making the call for such cuts, but up to this point have essentially refused to identify a specific program. If they think the President is going to bail them out of a political problem of their own making they should think again.

Tax rates for the top 2% are going up, but there is going to have to be some deal on administering fiscal medicine at some point. The Republicans are stuck between a rock and a hard place on that point. They claim to want spending cuts NOW, but they are for eliminating the sequester. They claim to want entitlement reform, but they know that the American public is not with them on that medicine. A portion of their Party wants MORE spending on Defense, and Farm Bill spending and Transportation spending is near and dear to many Republican members. How about the $50 billion for helping the victims of Hurricane Sandy? It has always been politically difficult to identify spending cuts that are specific. We are all for deficit reduction except when we are told what it is that entails. And that factoid is why the Speaker has not as of yet presented a counter-offer.

A deal is still possible, but for now the line shows “no deal” as the betting favorite, with corrective action taken in the first two weeks of January, once the tax rate question has been settled by the Bush cuts expiring. A final note: Please do not believe the drivel being put out there that the fiscal cliff is not real, or the ramifications of failure are not substantive. They are. Adults in the room please step forward.

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