Republicans and the Fiscal Cliff: What are they thinking?

Our government, whether headed by a Republican or a Democrat, governs for all of us. The Republicans lost this time around, though they still control the House of Representatives. They are in the minority. The Democrats, who control the Senate and the Executive branch, rightly expect to introduce and oversee policies that are more aligned with their view of what is best for the country than the views of the party that lost. But if they are wise and have the best interests of the country at heart they will take into account the views of the rest of the country as well. Compromise is part of the art of governing a diverse people successfully. Limiting the scope of government is another. See my comments on this theme over four years ago: “The Death of the Right?”

Many Republicans, however, are behaving as if they think they should force their views on the majority.  Not only is this unwillingness to compromise unacceptable in our democracy, it is producing worse outcomes for those of us who would like to keep government smaller. These republicans rejected a deal last year tentatively agreed between House Speaker John A. Boehner (R-Ohio) and President Obama that would have increased tax revenue by $800 billion over the next ten years in exchange for spending cuts three times that.  Without some sort of agreement by the end of this week, falling over the “fiscal cliff” will increase tax revenue by around $5,000 billion over the same period. That won’t happen, of course, as both parties want to restore the existing income tax rates for all but the wealthy. The Democrat controlled Senate has already passed such a bill, which would increase tax revenue by $700 billion over the next ten years. That would become the base line from which Obama would bargain for more tax revenue in exchange for budget cuts.

I assume that some minimalist agreement will be reached in the next week that will eliminate the worst tax effects from going over the cliff, but that will only perpetuate and prolong uncertainty over how our currently unsustainable future spending commitments will be rained in and/or financed. This uncertainty is a major factor contributing to the slow recovery of investment and the economy in general. The current impasse will continue to do great damage to the county.

According to Ezra Klein: “If Boehner had taken the White House’s deal in 2011, he could’ve stopped the tax increase at $800 billion. If he took their most recent deal, he could stop it at $1.2 trillion. But if he insists on adding another round to the negotiations — one that will likely come after the White House pockets $700 billion in tax increases — then any deal in which he gets the entitlement cuts he wants is going to mean a deal in which he accepts even more tax increases than the White House is currently demanding.

“Today, Boehner wishes he’d taken the deal the president offered him in 2011. A year from now, he might wish he’d taken the deal the president offered him in 2012.”[1] See also: “The GOPs worst cliff myth”[2]

For the sake of the country and for the sake of the principles in which many Republicans believe, they must recover (with the cooperation of Democrats) the art of governing.


[1] Ezra Klein, “Obamas small deal could lead to bigger tax increases” The Washington Post, Dec 22, 2012

[2] Ezra Klein, The Washington Post, Dec 24, 2012.

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About wcoats

Dr. Warren L. Coats specializes in advising central banks on monetary policy, and in the development of their capacity to formulate and implement monetary policy. He is retired from the International Monetary Fund, where, as Assistant Director of the Monetary and Financial Systems Department, he led missions to over twenty countries. Before then, he served as Visiting Economist to the Board of Governors of the Federal Reserve System, and to the World Bank, and was Assistant Prof of Economics at the Univ. of Virginia from 1970-75. Most recently he was Senior Monetary Policy Advisor to the Central Bank of Iraq; an IMF consultant to the central banks of Afghanistan, Kenya and Zimbabwe; and a Deloitte/USAID advisor to the Government of South Sudan. He is currently a member of the Editorial Board of the Cayman Financial Review and until the end of 2013 was a member of the IMF program team for Afghanistan. His most recent book is entitled "One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina."
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2 Responses to Republicans and the Fiscal Cliff: What are they thinking?

  1. Jim Kolbe says:

    The problem for Republicans is that the general public agrees with the broad outlines of this analysis, to wit: the Republicans are to blame for the impasse. The evidence is to the contrary. In 2011, Boehner and Obama had a tentative deal which included $800 B of new revenues. At the last moment when the “Gang of Six” in the Senate said they would consider even higher revenues, then Chief of Staff Bill Daley called Boehner and said the president couldn’t possibly take less than the $1.2 trillion the senators were offering. At this point Boehner walked away, saying it would be impossible to sell anything more than $800 B to his caucus. Both the extensive analyses in the Washington Post and New York Times agreed with this sequence of events.

    This Fall, as we approach the “fiscal cliff”, Boehner and Obama again tried to reach a deal and they did, in principle agree on the numbers. The rub is that that the changes to the tax laws are immediate, while any changes to spending–notably entitlement reform–is a promise for the future. Neither side has been explicit in how they would rein in entitlement spending. The point to keep in mind here is that none of the rest–tax increases for the rich, defense spending cuts, discretionary spending cuts–make any serious dent in the long term deficit/debt structural problems confronting the country. If you don’t face entitlement reform squarely on, the rest is just eyewash.

  2. The GOP definitely needs a makeover. This was possibly best exemplified by Boehner’s bungling of the negotiations…both times….http://realpolitiknewswithviews.wordpress.com/2012/12/27/2013-a-gop-gameplan/

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