Can Congress pull back from the brink?

By Gayle Tzemach Lemmon
December 13, 2012

Americans want to see Congress and the president make a deal on the “fiscal cliff,” that noxious mix of expiring tax cuts and mandatory spending slashing due at year’s end. They just don’t think it will happen without a lot of pain, according to recent polls.

But if Washington leaders don’t reach an agreement, which looks more than possible, it will be for a good reason: Incentives are strongest for policymakers to act only after the cliff has come and gone ‑ and wreaked a great deal of havoc in the process.

So far, the fiscal cliff looks like the Y2K of 2012. It’s an eventuality that requires a great deal of preparation and occupies politicians and the chattering classes but which has yet to produce the visible scars of crushed 401(k) statements, widespread layoffs or television graphics about a plunging Dow.

In a Washington where lawmakers rarely move unless an impending locomotive is about to run them over, it is hard to see how the mere possibility of a crisis can lead to action.

Some economists and politicians cite the 2008 TARP vote as proof that policymakers will indeed avert disaster and reach a deal before January 1. They say the House of Representatives’ passage of the troubled assets program shows that Congress can make politically difficult decisions on behalf of the greater good when financial markets push them.

But this is only half the lesson of that searing October day when TARP finally passed. The real lesson is that politics trumps prophesies of pain to come – especially when that problems exists only in theory.

I worked in financial markets in 2008, and we heard then these same grim warnings about economic Armageddon. Everyone from President George W. Bush to financial market leaders said that if TARP failed, the stock market would crater, the economy would shudder and the credit consequences would collapse.

Yet the bill failed ‑ despite all the warnings from economic experts and bond market mavens. Why? Because difficult political compromise was possible only after the economic consequences were experienced.

Like today, the political incentives were virtually tangible for lawmakers. A vote for public dollars to alleviate private losses was too painful and too unpopular to support, both for Democrats unsympathetic to Wall Street and Republicans uncomfortable with doling out hundreds of billions in government funds. That all changed when a Wall Street wipeout, played out live on CNN, pushed Congress back onto the floor before the week was out to vote for pragmatism over principle.

Today, with rhetorical urgency surging but economic consequences not yet visible, it is hard to envision lawmakers acting differently. Without feeling the coming economic tsunami, all the political incentives push the members of Congress down a very different path – and right over the cliff.

Our era is one in which the politics of corners, to use a boxing term, rules the day. In the political ring, elected officials now hug the ropes, shying away from engaging the other party. After all, moving to the center to do business could prove professionally risky, if not fatal. Moving off the ropes to meet in the middle is more likely to be met with a smack in the face than a handshake. For most politicians, hugging the corners is far easier.

Polarization is the rule rather than the exception, and partisan passions have created a pattern of ideological predictability. Congressional districts designed to re-elect one party or the other mean that the reward for politicians who compromise is anger from the base and, for Republicans, a primary challenge from the right.

Add to this, activists on each side are more energized and better funded than ever before alongside media outlets that serve only to echo and amplify views already held dear by liberals and conservatives.

Voters are not unlike their elected representatives in that they want a deal.  But only one with individual provisions with which they agree.  Fifty percent of respondents want President Barack Obama and congressional Republicans to “strike a comprehensive deal before the end of the year,” according to a poll in the Hill newspaper.

Yet they won’t accept what the real terms of this deal would mean. More than half oppose raising the Medicare eligibility age from 65 to 67.  And nearly 60 percent “reject the president’s demand that Congress give up power to set the country’s borrowing limit.”

So it should not be surprising that a deal to avert the fiscal cliff remains elusive.  The outlines are there, as Politico laid out Monday: compromise on tax hikes from the GOP side and on spending cuts and entitlement reform from the Democrats. But in Washington today the benefits of reaching a grand bargain are diffuse and shared among many — while the pain for agreeing to compromise is individual and acutely personal.

Liberals in Congress who campaigned against entitlement changes and supported a president who won re-election last month will likely find little to like in a deal that asks them to compromise. Meanwhile, conservatives who vowed not to raise taxes will find a split-the-difference approach as appetizing as three-month-old fruitcake.

Surely, some say, rational heads will prevail and the potential economic pain of the fiscal cliff and its forced spending cuts will drive leadership toward compromise.

But right now the incentives leading them away from a deal are more potent – and far more immediate. Obama won handily, campaigning on higher taxes for richer Americans. Dropping off the fiscal cliff might cause temporary economic paralysis, but it would also allow Democrats to portray the GOP as willing to take the entire economy hostage to preserve tax goodies for the 1 percent.

House Republican leaders may believe Obama holds a stronger set of cards, since polls show voters say “the GOP would be more to blame if the country goes over the fiscal cliff.” But that is unlikely to persuade the conservative base.

Perhaps the harsh reality of this politics of corners is one reason why Erskine Bowles, one half of Simpson-Bowles — the most famous Washington duo since Gramm and Rudman or Peaches and Herb — put the odds of reaching a deal before the year is out at just 40 percent.

A deal is likely to get done – eventually.  The question is, how much economic uncertainty – and damage – Americans will have to endure until then?

PHOTO: House Speaker John Boehner pauses during a news conference on the fiscal cliff, after a closed GOP meeting at Capitol Hill in Washington, December 5, 2012. REUTERS/Yuri Gripas

6 comments

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You are basically correct, “A deal is likely to get done – eventually. The question is, how much economic uncertainty – and damage – Americans will have to endure until then?”.

However, you are a good deal more optimistic than I am.

A good companion article to this piece is this one on “Why Republicans Can’t Propose Spending Cuts”, which is more realistic.

http://nymag.com/daily/intelligencer/201 2/12/why-republicans-cant-propose-spendi ng-cuts.html

Posted by Gordon2352 | Report as abusive

I think both parties realize that we need to go over the cliff. It is the only way we will be able to actually cut anything. Politicians can only give things away, not take them back. That goes for both parties.

Posted by tmc | Report as abusive

In 2008, there were not Tea Party Congressmen, determined to prove that government cannot work.

And they have insulated themselves from the fallout from any failure to compromise.

Posted by pavoter1946 | Report as abusive

When will politicians just do what is the best thing to do it should not mater if it is a democrat or republican idea if it is right for the country. both parties will shoot down a good idea just becaus it was the other parties idea. that is not what they were elected to do.

Posted by billyb212 | Report as abusive

They are worrying about the bond holders when unemployment is still high. From what read there was something like the fiscal cliff in many states that lasted for years.

If they are worried about debt how come they do not review the basic ideas behind our trade policy which has bee a failure for decades. An economic unit must sell (exports) as much as it buys (imports) or go into debt. The WTO rules and that of those economist that do not look real world results of ideas, say taxing excess imports is a no-no and taking steps to see local exporting firms get founded is export subsidies also a no-no.

Obviously if do not want to have the lowest wages,and want to have a growing population (children do not work but consume resources like education)and grannies that are not begging, you not the low cost international producer. But do not have to be, if you limit imports, and tax the non-exporting parts of the economy to support the needed exports.

Posted by Samrch | Report as abusive

I’m betting with Simpson-Bowles on avoiding the fiscal cliff, which is more about politics right now than fiscal policy. Congressional Republicans place party loyalty ahead of tax relief for most Americans — not a wholesome political strategy. Resisting more taxes on the wealthy, GOP leaders offer trickle down economics theory to the middle class. This is like putting lipstick on a pig, given their tenuous position. The first thing over the cliff may be Republican credibility.

Posted by starbuc | Report as abusive

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