The lessons of the fiscal cliff

January 2, 2013

There is a narrative in American politics that goes something like this: The White House can't negotiate. House Republicans can't be reasoned with. And so the country is caught between pragmatists who can't hold their ground and radicals who can't compromise.


So what have we learned, hmm? (AFP/Getty)

The last few days complicate those narratives. The White House didn't hold firm on their promise to let the Bush tax cuts expire for all income over $250,000. They agreed to a $450,000 threshold instead. But at the same time, they pocketed more than $600 billion in revenue, $30 billion in extended unemployment benefits and five years of stimulus tax credits without giving up any real spending cuts. 

Speaker John Boehner, negotiating on behalf of House Republicans, rejected the White House's offers for a bigger deal that included big spending cuts and watched his "plan B" die on the House floor. But, with the support of many of his members, he ended up shepherding the McConnell-Biden package towards final passage. Republicans realized they couldn't be blamed for pushing the country over the cliff. 

The question of who "won" the fiscal cliff won't be answered till we know what happens when Congress reaches the debt ceiling. The White House says that there'll be no negotiations over the debt ceiling, and that if Republicans want further spending cuts, their only chance is to hand over more tax revenue. If they're right and they do manage to enforce a 1:1 ratio of tax hikes to spending cuts in the next deal, they're going to look like geniuses.

Republicans swear they are crazy enough to push the country into default, and they promise that the White House isn't strong enough to stand by and let it happen. If they're right, and the White House agrees to big spending cuts absent significant tax increases in order to avert default, then Republicans will have held taxes far lower than anyone thought possible.

But both Republicans and Democrats can't be right. If we take the lessons of this negotiation, here's what will happen: The White House will negotiate over the debt ceiling. They'll say they're not negotiating over the debt ceiling, and in the end, they may well refuse to be held hostage over the debt ceiling, but the debt ceiling will be part of the pressure Republicans use to force the next deal. The White House fears default, and in the end, they always negotiate.

That said, the Republicans aren't quite as crazy as they'd like the Democrats to believe. They were scared to take the country over the fiscal cliff. They're going to be terrified to force the country into default, as the economic consequences would be calamitous. They know they need to offer the White House a deal that the White House can actually take -- or at least a deal that, if the White House doesn't take it, doesn't lead to Republicans shouldering the blame for crashing the global economy. That deal will have to include taxes, though the tax increases could come through reform rather than higher rates.

The Republicans also have a problem the White House doesn't: The public broadly believes they're less reasonable and willing to negotiate than the Democrats are. The White House has a reputation for, if anything, being too quick to fold. They have more room to avoid blame for a default than the Republicans do. In the end, if the White House holds its ground, Republicans will likely compromise -- though only after the White House has done quite a bit of compromising, too. 

The final moments of the fiscal cliff offered evidence that both sides see how this is going to go. In his remarks tonight, President Obama signaled he would hold firm on the debt ceiling. "While I will negotiate over many things, I will not have another debate with this Congress over whether or not they should pay the bills they’ve already racked up through the laws they have passed," he said. And Boehner signaled that he knows tax reform will have to be part of the next deal. The post-deal press release his office sent out had the headline, "2013 Must Be About Cutting Spending and Reforming the Tax Code."

That said, the final days of the fiscal cliff, in which the deal almost broke apart a half-dozen times for a hal-dozen reasons, is a reminder that these tense, deadline negotiations can easily go awry. And so there's a third possibility, too: That the White House is wrong about the Republicans will compromise, that the Republicans are wrong that the White House will fold, and so we really will breach the debt ceiling, unleashing economic havoc.

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