The Case For Going Over The Cliff Remains Strong

Moneybox
A blog about business and economics.
Dec. 21 2012 11:18 AM

The Case For Going Over The Cliff Remains Strong

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WASHINGTON, DC - DECEMBER 20: U.S. President Barack Obama walks to the White House December 20, 2012 in Washington, DC.

Photo by Chip Somodevilla/Getty Images

I wrote earlier today that I think the failure of Plan B makes a deal more likely than it would have been had the bill passed. But I do want to emphasize that there continues to be an excellent chance that a deal won't be made until January, and a strong case that the otucome will be better on the merits if we wait until January.

One key issue is that, as John Boehner said today, many of his members were reluctant to vote for Plan B because of "a perception" that it would be a vote to increase taxes. That's nuts. The full expiration of the Bush tax cuts is the law of the land. The debate between the White House and the GOP is over how much to cut taxes. But a variety of factors, including the Obama administration's messaging and the Congressional Budget Office's counterproductive insistence on publication of an "Alternative Fiscal Scenario" baseline have clouded this issue. Come January, however, perception changes. Tax rates will be higher than they are today. Bills will be on the floor to make them lower. Opposition to moderate tax cuts as a tactical move to force larger tax cuts will still be an option, but the huge perception barrier to reaching a deal on taxes will be removed.

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The thornier post-cliff bargaining will happen around the budget sequester. Republicans keep pressing to eliminate the defense sequester but not the domestic sequester and to replace the defense sequester with cuts to anti-poverty programs. That's a fun messaging vote for a party that's perversely determined to make poor people suffer but not an actual strategy to avoid defense cuts. If the GOP really wants to halt those cuts, they'll have to come to the table with something more plausible and we'll see what Obama says. But there's no huge conceptual barrier to a deal. Congress could simply proclaim that whatever it is they've done on the tax side is adequate to lift the whole sequester.

What this leaves out is the additional stimulus that the Obama administration has been trying to work into a pre-cliff deal.

Their efforts to secure this are worthy and important. But as we've gone through three rounds of White House offers to the GOP, this is the portion where they keep giving the most ground. Obama's opening bid including a really meaningful stimulus. His last bad including a UI extension that's important in humanitarian terms but hardly a game-changer, and a vague infrastructure proposal that could plausibly be advanced through a separate vehicle. The expiration of the payroll tax holiday—the single most important part of the fiscal cliff—doesn't seem to be in the bargaining mix at all. If a deal is reached before the new year, Obama will presumably have to give a little more more ground than he did in his last offer, which probably means an even smaller and less meaningful stimulus.

So given all that, I see no particular reason to hope for a cliff-avoiding deal. The big difference is that a December deal is likely to have bigger tax increases offset by larger spending cuts, while a January deal is likely to be much more modest. If the country were facing crowding out of private investment or inflationary pressures, those would be good reasons to prefer a bigger deal to a smaller one. But despite the hype that's not the case. What's needed is for something—anything—to happen that even momentarily causes the deficit scolds to quiet down and let congress try to address some of the other issues that are piling up.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.