Obama and Boehner's bridge across the fis­cal cliff

“Vot­ers were so im­pressed with the re­sults that they have re-elected the two lead­ers so they can have an­other go this time to help the coun­try avoid a head­long dive over the dreaded fis­cal cliff.”

The Pak Banker - - Front Page - Sean West

THE last time Pres­i­dent Barack Obama and House Speaker John Boehner squared off over fis­cal prob­lems, they trig­gered tremen­dous mar­ket volatil­ity, cost the US its AAA credit rat­ing and nearly pushed the gov­ern­ment into de­fault. Vot­ers were so im­pressed with the re­sults that they have re-elected the two lead­ers so they can have an­other go -- this time to help the coun­try avoid a head­long dive over the dreaded fis­cal cliff.

Fear not: The play­ers are the same, but the game has fun­da­men­tally changed.

The bat­tle in 2011 over the debt ceil­ing wasn't ac­tu­ally about the debt ceil­ing: It was about fix­ing the deficit. But nei­ther side wanted to ac­cept a com­pro­mise that might an­tag­o­nize party loy­al­ists on the eve of cam­paign sea­son or to make con­ces­sions that the elec­tion out­come might ren­der un­nec­es­sary.

They spent so much time de­bat­ing an un­reach­able big deal that they had to rush sim­ply to agree to raise the debt limit with­out de­fault­ing. Mar­kets shud­der when the coun­try with the low­est credit risk in the world has to think about pay­ing its bills.

The fis­cal cliff -- the au­to­matic tax in­creases and spend­ing cuts set to take ef­fect in Jan­uary if Obama and Boehner don't reach a bud­get deal -- is much dif­fer­ent.

There is a large bat­tle to be had over broader deficit re­duc­tion, but that is not the im­me­di­ate is­sue fac­ing Wash­ing­ton on Jan. 1. No one thinks the deficit will be solved in the lame- duck pe­riod: Avoid­ing the fis­cal cliff means sim­ply find­ing a way to de­lay the prob­lem this year with­out sur­ren­der­ing ne­go­ti­at­ing lever­age for the larger fight next year.

In 2011, ex­pec­ta­tions were raised that Democrats and Republicans would solve fis­cal prob­lems in con­junc­tion with a debt-limit in­crease in or­der to avoid a credit down­grade and keep the bond vigi- lantes at bay. This year, credit raters and Trea­sury mar­kets have sig­naled that the US will not be pun­ished for "punt­ing" de­ci­sions into 2013.

Thus, avoid­ing the fis­cal cliff re­quires only "build­ing a bridge" to the new year. Both sides have clear in­cen­tives to avoid a dis­as­ter for which both par­ties would be blamed. Nei­ther side has a bet­ter al­ter­na­tive. That's why the fis­cal cliff is a self­deny­ing prophecy: It's so bad, it not only can't hap­pen, it can't cred­i­bly be threat­ened.

If ei­ther side takes a hard-line po­si­tion while threat­en­ing to push the US over the edge, ex­ter­nal pres­sure from busi­ness lead­ers and vot­ers rains down upon it. That's why nei­ther side cam­paigned on will­ing­ness to go over the cliff ab­sent a deal on its terms. Obama was just re-elected on a pledge to raise taxes on the wealth­i­est Amer­i­cans, and vot­ers have given him a man­date to pur­sue his poli­cies. Some of the fear aroused by dire me­dia warn­ings of fis­cal-cliff dis­as­ter cen­ters on the mis­con­cep­tion that, be­cause the so-called Bush tax cuts ex­pire at year-end, the pres­i­dent has an in­cen­tive to ride over the cliff, let all these tax cuts ex­pire, and then sim­ply put the tax cuts for the mid­dle class back in place next year. Of course, in the in­terim, there would be a dra­matic fis­cal and mar­ket shock from both the on­set of aus­ter­ity and the fear that it will not be re­versed.

If there is no fis­cal cliff deal, Obama would then pre­side over eco­nomic and fi­nan­cial car­nage as he tries to frame his sec­ond term. In­stead of craft­ing an am­bi­tious sec­ondterm vi­sion for his Jan­uary in­au­gu­ral ad­dress, he would in­stead spend his time and en­ergy try­ing to push off blame for the eco­nomic calamity un­der way.

The vot­ers who just granted him a sec­ond term would see hun­dreds of dol­lars of cuts to their first pay­checks in 2013. Com­pa­nies that backed him will fire work­ers as gov­ern­ment con­tracts are cut and the broader cor­po­rate community will scream about how the re­cov­ery has been knocked off course. Far from free­ing him to play hero later, this melt­down would stran­gle his sec­ond term be­fore it be­gan.

Boehner's po­si­tion is sim­i­lar. The elec­tion's weak­en­ing of the Tea Party strength­ens the speaker's con­trol of his cau­cus, but he is weaker to­day rel­a­tive to the newly re­elected pres­i­dent than he was last year. Boehner knows he risks a pub­lic back­lash if he ap­pears to lead a party blamed for leg­isla­tive ob­struc­tion into plung­ing the US econ­omy over the edge.

That sort of blame would dra­mat­i­cally re­duce his lever­age in the larger 2013 fis­cal de­bate where the real, sub­stan­tive is­sues re­main on the ta­ble. This came through very clearly in his first post-elec­tion press con­fer­ence: In to­tal con­trast to the shoot-fromthe hip speaker of 2011, Boehner's speech was a plea for a deal, de­liv­ered from two teleprompters. He knows he has lit­tle room for er­ror.

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