Merriam-Webster's dictionary defines Kabuki as "traditional Japanese popular drama performed with highly stylized singing and dancing..." We are seeing something like that since the election in the matter of the "fiscal cliff." All seem to say they don't want to go over it, yet few seem prepared to make the compromises that will prevent it from happening. And there is much ritual dancing and posturing.
For readers who have just returned from outer space, I'll simply note that the "cliff" is an artificial day of reckoning that was erected by Congress and the president, midway through 2011, to deal with out-of-control federal deficits that no one wanted to fight over at that time. The geniuses on Capitol Hill reasoned (using the term generously) that the contentious issues of taxes and spending would be much easier to deal with after the presidential election of 2012 was out of the way.
Accordingly, they extended the so-called "Bush tax rates" and reduced payroll taxes thru 2012, and scheduled "sequestered" cuts of $100 billion per year – to be applied equally to defense and non-defense spending – unless alternate cuts and tax-revisions were agreed to before January 1, 2013. Those conditions – now called the "fiscal cliff" – were considered so drastic that it was assumed that neither the president nor the Congress would wish to send the country into recession by invoking them. But somewhere those calculations seem to have gone amiss.
In truth, not everything in the cliff-scenario reaches the same level of "drasticity." A cut of $50 billion out of the defense budget of $631 billion for FY2013 is certainly pretty steep (8%). Cutting another $50 billion every year for the next 9 years seems even steeper. But non-defense discretionary spending for 2013 totals $1.25 trillion. A cut of $50 billion from that total wouldn't bite nearly as hard as the same cuts from defense spending. Eventually the cuts would become serious money, of course, but that's the point. The intention is to reduce the budget gradually until it can come into balance.
On the other hand, many economists say the complete elimination of the 2003 Bush tax rates, with reversion to the rates extant during the Clinton presidency, would be a huge shock to the country's financial system – possibly triggering another recession. The fiscal analysis of the effects of this sudden increase in tax rates for all levels and kinds of income is beyond most of us, and is certainly too complex to present in this column. (Please see "Breaking down the Cliff: the Bush Tax Cuts" (http://www.bloomberg.com/news/2012-11-28/breaking-down-the-cliff-the-bush-tax-cuts.html).
The bottom line seems to be an increase in tax revenue estimated at $325 billion over the next two years, leading to a decrease of approximately 1.8% in the GDP, which currently stands at $16 trillion a year. Obviously, these simple scorings do not begin to get at the complexity of drawing this much money out of an already-weak economy.
These estimates are made under the assumption that all fiscal activities – i.e., earning, hiring, business-creation, investment, etc. – will carry on exactly as they would have under the Bush rates, without any adjustment made by taxpayers to compensate for the higher taxes. Democrats always assume this, as a political article of faith, while Republicans believe that tax-rates and policy do cause fiscal behaviors to change.
Dems like to claim that the economy expanded under President Clinton, after he raised taxes in 1993, while ignoring the fact that a Republican Congress – elected in 1994 – forced Mr. Clinton to cut spending, reform welfare, and reduce taxes on dividends and capital gains. Republicans prodded Mr. Clinton toward fiscal expansion, and the estimable Bubba was smart enough not to fight it. He will be remembered for presiding over the first balanced budget in 30 years, more or less in spite of himself.
Mr. Obama is presiding over a different financial situation than Bill Clinton's of the mid-1990s. He is putting on a stubborn front – apparently hunkered down for whatever happens, including a crash over the "cliff." In my judgment, several hypothetical possibilities attach to the end-game on these matters:
A) Mr. Obama's financial gurus have calculated that allowing the sequestered cuts and the Clinton tax rates to take effect won't really be that bad, so they are considered acceptable options. He will let us go "over the cliff" in the expectation that the economy will stand the shock and recover.
B) Mr. Obama knows going over the cliff will wreck the economy and plunge it into a new recession, but he believes the media will successfully pin the blame on Republicans, not himself. He will use the new recession as an "opportunity" for more spending and government control.
C) Mr. Obama believes Republicans are more frightened of the cliff than he is. (Clearly, he is right.) He believes they will meet his terms – i.e., his demand that the Bush rates be retained for all except income over $200,000 a year ($250,000 for married couples). He expects the media to suppress the fact that the "revenue" from this tax-rise will do little to reduce the deficit.
D) Mr. Obama will compromise at the eleventh hour and meet Republicans halfway on their insistence that all tax-rates stay at the Bush levels, while they agree to eliminate or reduce favored tax deductions such as charitable giving, mortgage interest, and real-estate taxes. He'll pose as the Great Compromiser, while eliminating deductions, which he has desired all along.
E) Mr. Obama will play "chicken" on the "cliff" until the last minute, whereupon he will fold completely and agree to extend the Bush rates for another two years, with no revision in the tax code and no spending cuts. (Or he might extend the Bush rates indefinitely.)
Of these possible scenarios, I believe D) and E) are the least likely, while C) is the most likely. However, I also believe both A) and B) are entirely plausible and well within the realm of possibility. Other analysts of greater stature than mine share variations on this view.
Mr. Obama and Congressional Republican leaders are negotiating under different premises. Mr. Obama and his minions are engaged in Kabuki theater, including highly stylized media photo-ops of him visiting down-home families who will be affected by the tax-increases and sequestrations – all the while declaring how much he wants resolution. "Nobody wants this settled as much as I do," he has repeatedly declaimed. Yet it seems not to have occurred to reporters to ask why Mr. Obama's desire to resolve the crisis does not extend to compromising on his hard-line position of raising taxes on incomes above $200,000. The firmness of his position on this seems beyond question.
Congressional leaders, including House Speaker John Boehner and Senate Minority Leader Mitch McConnell, assume that Mr. Obama is negotiating in good faith to reach an accommodation, just as they are. But they are mistaken. The president is doing no such thing. A child could see that he has offered nothing. This past week, he sent Treasury Secretary Geitner out with a proposal so absurd that Senator McConnell laughed out loud at it. The chance that Mr. Obama will accept options D) or E) is very close to zero. I believe he has no intention of moving off his position. He expects C), but he will accept A) or B).
What can Republicans do? For whatever my counsel is worth in this high-stakes poker game, I believe the key is not to blink. Stake out a reasonable position; add some details, including credible estimates of what any cuts in deductions will cost taxpayers at various income levels; and show what it will cost to let the Bush rates expire. Put your plan out there. Let Paul Ryan explain it in prime time. Then let it ride.
It also wouldn't hurt to play the game as Democrats do, with touching vignettes of Mr. Boehner and Senator McConnell visiting small business owners and middle-class families who will be hurt if Mr. Obama lets us go over the cliff. Mr. Obama insists on engaging in Kabuki theater. Republicans ought to be able to compete well on the same stage. After all, many Asians vote Republican...