Winners and Losers from the Fiscal Cliff Deal — 7 January 2013

Last week I promised to offer some ideas about how to address the “welfare cliff,” and I fully intend to do so.  But I wanted to offer some thoughts about the recent “fiscal cliff” deal, before the whole subject went stale.  It seems to me that the winners and losers in this deal are not necessarily the ones conventional wisdom would suggest.

First off, Congressional Republicans: it certainly appeared that they were in complete disarray, unable to unite even around Speaker Boehner’s Plan B – the proposal to raise income tax rates only for those making $1,000,000 or more.  That certainly allowed the Democrats and their media allies to portray the GOP as unwilling to raise taxes on even the most Romney-esque of the plutocrats, and willing to send the rest of the country’s taxpayers over the cliff to protect them.  Unquestionably, in terms of PR points, the Republicans took a beating.

And yet, they survived the battle with their integrity intact.  They did not actually vote to increase taxes – as of January 1, when they voted, tax rates had already gone up; what they did was to vote to restore the Bush tax rates – and make them permanent – for virtually all taxpayers.  Even Grover Norquist, proponent of the No-Tax Pledge, gave this move his approval.  I know, it’s a bit of a fig leaf, but in terms of political commitment, it matters – remember how George HW Bush was flayed for reneging on his “read my lips” pledge.

More to the point, the fight now moves to spending, and on this I think the Republicans will find themselves with much better leverage.  No longer will Obama be able to stymie them by insisting on tax increases for the wealthy in exchange for spending cuts.  There are two big choke points ahead – the raising of the debt ceiling and the arrival of the deferred spending sequesters – that the Republicans can use to extract some spending concessions.  It remains to be seen if they can marshall their forces effectively to achieve that, but having made the concessions on tax hikes, the big source of internal division is gone.

So count the GOP as potential winners when this is all said and done.

What about President Obama, then?  Clearly, a tactical victory for him: he finally got the tax hikes on “millionaires and billionaires” that he has been lusting after since the day he was first elected.  But the question now is, what next?

I would argue that Obama is weakened, not strengthened, by this deal for the fights ahead.  For one thing, his big bargaining chip has been spent.  He can no longer craft a deal where he trades tax changes for spending allowances.  He got what he could on tax hikes, now the GOP will get what they can on spending.  And despite his tough talk about not negotiating the debt ceiling, he will be forced to do just that, because he needs Republican votes to gain passage.

More fundamentally, President Obama’s negotiating style has proven to the Republicans that he can’t be trusted, and they will not be fooled into it again.  They had hoped that after the election he would approach the lame-duck session with a spirit of magnanimity, looking to get a deal done that both sides could be reasonably happy with.  Instead, his opening bid was to demand twice the tax hikes he had proposed back in 2011, and more rather than less spending.  When Boehner put $800 billion in tax revenues on the table and asked, “what do I get for that?” the President replied, “Nothing.  I get that for free.”

Speaker Boehner revealed in an interview today that the President insisted during their negotiations that “we don’t have a spending problem.”  It’s hard to come to agreement with a counterpart who doesn’t even acknowledge the problem you’re trying to solve.

The upshot of all of this will be no more closed-door attempts at negotiation with President Obama.  Indeed, Obama was relegated to spectator status at the closure of this negotiation.  Going forward, I expect to see the Republicans follow procedure: they will pass measures and insist that the Senate take them up and deal with them, the way they should have done on vital matters like the budget for the last three years.

Senate Majority Leader Harry Reid, by the way, is a loser in this.  Even when the spotlight swung to the Senate, he was AWOL.  He wasn’t party to the final negotiations.

Big loser in the fiscal-cliff deal: the American people and the economy upon which they depend to provide for their welfare.  It has been a problem for the last four years that temporary measures, extensions of programs and tax provisions, and the as-yet-undefined tsunami of regulations stemming from Dodd-Frank and Obamacare do more harm than good for the economy.  Businesses want clarity and stability in the tax and regulatory environment they face, and for four years they have had anything but.  This measure, while it has the merit of making the existing tax rates permanent for many, still leaves the spending side of the equation in limbo.

Then, of course, there is the economic effect of the tax increases.  Democrats may think that tax hikes on the “very wealthy” will have no effect on the economy, but the fact is that this effectively raises the tax rates on small business.  Moreover, despite the brave talk from the White House, taxes are going up on millions who make much less than $400,000: the revival of provisions that limit deductions for taxpayers making as little as $250,000 will raise about a quarter of the revenue from this supposed tax rate hike on the rich.  And the payroll tax holiday – which gave every taxpaying household a 2% boost to their take-home pay – was allowed to expire.  So even your minimum-wage Joe is going to see a smaller paycheck this year.

The real big losers of this deal are the children and grandchildren of today’s taxpayers.  Their future is being eroded every day, and their parents send people to Washington who simply cannot come to grips with the Jupiterian debts they are piling up.

The surprise winner? George W. Bush.  It has long been a little-remarked fact that Bush’s counter-terrorism policies have been adopted nearly wholesale by the Obama administration.  Now, his principle domestic policy has been ratified as well.  Remember that Bush’s tax cuts were originally scorned as giveaways for the rich.   And they were considered to be so costly to the Treasury that they were made temporary.

Today they are so vital to the well-being of the middle class – that, of course, was Bush’s argument in the first place – that Democrats were fighting tooth and claw to preserve them and to preserve them permanently.  So, big victory for the Bush tax cuts.

The other surprise winner?  Joe Biden.  Who would have thought that Jovial Joe would turn out to be the adult in the room, and carve out a deal when his boss couldn’t get it done?

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