Two events stir me to add to my fiscal cliff ruminations: one the reading of Bob Woodward’s book on the 2011 negotiations The Price of Power and attending a meeting with my Brookings colleagues on the cliff prospects. Let me begin with several highlights from the Woodward book which I recommend to anyone who stumbles upon my blog. It is tough reading at times – endless discussions of this meeting and that session, etc. -- but rewarding for the light it casts on the agreement forming the background for the present negotiations over the “cliff.” A few nuggets from the book: it is commonly supposed that the Republicans were the “hostage takers” on the debt ceiling and the source of irresponsible threats to de-stabilize the economy, the nation, and the rest of the nonsense. Actually, Sen. McConnell proposed a scheme in the negations whereby he Senate (and Congress) would vote to surrender power to the President for the purpose of his being able to raise the debt ceiling. It was a rather complicated scheme and the white House had some doubts it would work. Here’s what the plan called for: in this one instance Obama could raise the ceiling to whatever he wanted and the Congress would then in the fashion of the old “legislative veto” provisions (I forget whether McConnell made it a one house [Senate only] or two house veto) have no option to vote against the Presidential action. McConnell thus gave his colleagues the chance to vote against raising the ceiling, but since it would take two-thirds to override the Presidential action the President’s action in raising the ceiling would stand. The Senate/Congressional vote would amount to nothing other than political cover for the Republicans to vote against it. At this point Harry Reid rose in wrathful opposition. He did not spend 24 years as a U.S. Senator to give away his constitutional powers. He didn’t give a damn what the President said; he would agree only to a two-step process of raising the ceiling, a $1 trillion first step followed by another raise if certain steps were taken in the meanwhile.
The White House felt outraged at this point. Reid was giving away the President’s key demand, namely, that the debt ceiling issue be settled and not come up again until after the 2012 election.
Boehner meanwhile was having some doubts about the possibility of negotiating anything with Obama. Obama seemed to offer a good deal at first blush; he would go raising Medicare’s age limit to 67 years over a 40 year period, a bit more means testing on Part B, the new CPI index for Social Security and federal civilian and military pensions, and some other steps on the spending side if Boehner would deliver on the $800 billion in taxes (Boehner was offering only tax reform as the vehicle to achieve the increased revenues). He figure he could deliver his caucus by pointing out to his Republican colleagues that Obama was agreeing to cuts in health spending. Thus the Dems could be in effect abandoning one of their chief electoral weapons: the familiar Mediscare tactic with which they had been clubbing the republicans on the head for years. However, after Obama talked seriously to Pelosi and Reid he began to get cold feet on his potential commitments. Pelosi told the President flatly that he could not agree to Medicare cuts because this would surrender the principal differentiating factors between the two parties: the Democrats’ appeal to the voters to defend their Medicare against the naughty Republicans like Ryan who wanted to voucherize the program. Obama’s commitments thus turned into vapors and like vapors soon evaporated, leaving behind (so it appeared to Boehner) only a faint odor.
Then along came another development that shook Boehner’s confidence in the President. The Gang of Six came out at the worst possible time with their plan which included $1.2 trillion in taxes calculated against a different base but making Boehner’s offer of $800 look picayune in comparison. To Boehner’s amazement the President rhetorically embraced the Gang of Six proposal, advised by David Pluff that one must not lose the PR game by letting the Gang get favorable headlines. What in the name of god is Obama doing, thought Boehner and his aides, embracing this silly proposal which was so totally different in every way from what they had been negotiating with the President? Obama then began pressing Boehner, first by letting an aide forward a trial balloon with a raise in the taxes to $1.2 trillion and then by himself demanding of Boehner that he raise the tax offer because Obama needed this to get Pelosi and Reid on board. Since Obama was unwilling to stand up to Reid and Pelosi it dawned on Boehner that he might as well negotiate the deal directly with the Senate leadership and forget about Obama. He concluded that Obama was incapable of or unwilling to negotiate a deal. I interject here my own observation that Obama’s skills as a negotiator are depicted by Woodward in, shall we put it delicately, in a less than favorably le light.
The White House is subsequently informed by Reid’s office that they are concluding a deal with Boehner. Enraged, the President loses his cool, apparently for the first time in his presidency, and blows up at Boehner, accusing him of treachery, etc., and the President then summons the Congressional leadership (without staff) to come to a key Saturday meeting at the White House to resolve the issues. Obama opens the meeting by laying out the issues as he sees the. He is accompanied only by Tim Gaithner who reiterates the dire consequences of default, etc. Then, amazingly, Harry Reid asks the President to leave the meeting so that he may talk with the Congressional leaders alone. Obama later tells Bob Woodward that he was happy to do this, that he had no pride of authorship, that he only wanted to solve the problem, etc. But it is quite clear that Obama was enraged at being cut out of the decision-making process. The Congressional leaders then in Obama’s absence cut the short-term deal with the Super Committee, sequester, etc. and have a two-step provision on he debt ceiling. This is essentially what became the compromise which is now being negotiated – that is, it set forth the fiscal cliff. The one exception was that the President got back into the act to the extent that he achieved his primary objective of pushing off the debt ceiling issue until after the election. Other than that the whole process was carried out by the Congressional leaders with the President being largely irrelevant. This is the story of the Woodward book. There are many interesting details that could be elaborated and twists to the story, but in outline that is the story.
Now where are we? The answer is that of course we don’t know. The kabuki dance is going on and progress may be made. Unhappily it looks to me that we are uncomfortably close to repeating the same story line as Woodward presents of the 2011 negotiations. Boehner and Obama are meeting, the tone is positive, and the two sides remain miles apart. In fact it is worse than 2011. Obama, having felt humiliated at being cut out of the 2011 negotiations, seems bound to humiliate his enemies this time (and most particularly Boehner and his Republican colleagues). Obama this time is not even bothering with the vapors. He is simply saying that since he won the election the Republicans must raise tax rates for the rich (not through tax reform but through actual raising of rates for the high earners). In return, once the Republicans have actually voted for the raise or clearly agreed to raise the rates for the rich and extend the other bush tax cuts, then he WILL BEGIN TO THINK ABOUT doing something on spending, not actually do anything but to talk about doing something somewhere down the line. Furthermore he will not specify what such steps might be until the Republicans have done their bit. When faced with the predictable reaction to this negotiating stance, what does the President do? Does he redouble his negotiating efforts – no, he goes back on the campaign trail, as if the election never happened. Boehner is baffled. This is GroundHog Day; we are going through the 2011 cycle again. What accounts for this bizarre presidential behavior? Let’s try to construct the reasoning process that the liberals and the Dems are relying on here as difficult as it might be. The logic is something like Eric Foner’s criticism of Spielberg’s Lincoln. The importance of the “insider” maneuvers by Lincoln and his allies were exaggerated; what was more important was the groundswell of public sentiment stirred up by the Seneca Falls ladies, the brave performance of Blacks on the battle field, the energetic actions of the Abolitionists in raising the public’s ire. The “inside” game is secondary in importance to the outside factors – the will of the people, etc. Obama thinks he will put the heat on the Republicans who will at last knuckle under and cry “Uncle!”
The Liberal Mind is a strange and wondrous thing. Liberals will fight to the death for tolerance; hey will defend your right to express your opinion, even if it is a conservative one. However they are actually amazed if anyone holds, and dares to express, an opinion that is different from theirs. Even more amazing to them is the tendency of some of those strange beings, the Conservatives, to insist on having their opinions considered by policy makers. If only those people would acknowledge that they are 100 percent wrong and agree to accept the fact that the liberals are 100 percent right there would be no problem – agreement could be quickly reached! Why are they being so stubborn when the liberals and the talking heads agree that the current Republican Party is made up of crazies? Proof of the insanity of the Republicans is that they now talk “hostage taking” once again on the debt ceiling and they think they have strong leverage against the President when the opinion leaders have decided that the only course for the Republicans is to surrender. The liberals have become almost hysterical; they just know that those naughty Republicans would like nothing better than to destroy the world economy, ruin the country, and immolate themselves as a political force.
I would now like to present a more sane view (that is, my view and the view of a few of my conservative colleagues). The Republicans, and especially the Republicans in the Senate (the departure of Jim DeMint is nothing but an unalloyed blessing for our present purposes) do not consider that the debt ceiling gives them tremendous leverage to take irresponsible positions. Rather they know that it only gives them a chance to stay in the game and have some voice in policy on the issues that matter, namely, tax reform to promote growth and spending cuts to create fiscal sanity for the future. If they de-couple the debt ceiling from tax reform and spending cuts they know that nothing will happen on those issues. They count further that Wall Street will want a solution to our problems and will understand that there will never be a repudiat5iohn of U.S. debts. Since no deal with Obama seems forthcoming (so many think) we might as well do what was done in 2011: negotiate a deal with Harry Reid that would raise rates on the highest earners, salvage low taxes on capital gains and dividends and probably something on the estate tax, probably provide a temporary fix on the alternative minimum tax, and maybe extend unemployment insurance for a while. Whether payroll deductions will be extended, the Doc Fix agreed on, and other consequences of the cliff are probably now being quietly negotiated by the Congressional leaders. There will also be some softening of the defense sequester. Phase 2 of the deal will leave tax reform, spending cuts, and the debt ceiling to be negotiated by the end of next year, with probably the debt ceiling or some variant of the present fiscal cliff laid out in the Phase 1 short-term agreement as the action-forcing mechanism to ensure that negations go forward on the longer term fiscal issues.
Will this be enough for Wall Street? Here I use Wall Street as an abstract noun to denote the whole of world financial markets, the behavior of financial and non-financial firms, and the American consumers. Wall Street has demonstrated a robust capacity for irrational behavior so we cannot be too confident about the reaction to another short-term deal that defers action on key issues. So far, however, Wall Street has not gone bonkers over the cliff. Business firms have gradually started to invest a bit and consumers have shifted away a bit from complete absorption with de-leveraging that has been their wont since the financial crisis. If the liberals could stop crying “Wolf!” and howling about how dire everything is, and if the conservatives would just shut up, and the public stop listening to the talking heads, we would probably find ourselves not too badly off once we have averted the cliff (as we surely will). There will always be a deal. The only question is how good a deal and if the pundits would accept something short of miracles we will probably be able to live with the deal. Until the next deal which we will also be able to live with until the next deal after that, and so on. It is in the nature of politics that there will never be a permanent settlement of everything. There are only partial, proximate and less than fully satisfactory settlements which carry us through this crisis to the next crisis if people can manage to keep their wits. The only thing that is permanent is death (although I should perhaps acknowledge for my base that there may even be triumph over death – the ancient Greeks said that human beings are superior to the Gods who are immortal because we face and triumph over death and Christians and Jews believe in resurrection).
House had some doubts that it would work. Here’s what it did: Obma could raise the ceiling to whatever he wanted this one instance and the Senate (or both Houses).
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