02 January 2013

So much for Cliffmas

You might have seen the headlines. The Fiscal Cliff averted. Negotiations Down to the Wire. Breathless commentary about how Congressional leaders and Biden worked to find a compromise solution.

Such rubbish.

As I mentioned before, there was no need for a frenzied last minute bargaining. If they let the whole thing be, much higher capital gains taxes and serious income tax rate hikes were going to become law. Democrats could simply enact lower income tax and longer unemployment benefits in the first week of January and give the Republicans the choice to refuse tax reductions for the middle classes.

If they had negotiated a package deal after Cliffmas, Republicans would have no choice but come to the table in order to offset higher capital gains, estate and income taxes for the wealthy. More importantly, holding on to the higher taxes for the wealthy would have given Obama a solid leverage for borrowing limits, spending priorities and Social Security and Medicare reform.

Incidentally, whoever claims that tax increases would have led to instant recession is not telling you the truth. Middle class taxes will have become effective next fiscal year and many things could have been modified between now and then.

Also, it is interesting to note that the very same people who now express fear that any money siphoned off the economy would lead to recession were demanding austerity measures just a few short weeks ago. And as soon as this deal is signed, they will go back asking for spending reductions (i.e siphoning off money from the economy).

And the same people who maintained that the deficit was number one priority are the same ones who now refuse to bring in more revenue from the 1 percenters.

Understandably, the corporate media are putting a positive spin on this agreement. They are also carefully and studiously avoiding these questions.

But the deal that Democrats just signed will prove to be disastrous and Obama will almost certainly have to negotiate a Grand Bargain that will significantly reduce Social Security and Medicare benefits and increase the retirement age. That is because Democrats (and Obama) have just decoupled tax increases for the wealthy from borrowing limits, spending priorities and Social Security and Medicare reform. And postponed that debate for another two months.

That means that, in two months time, the Republicans will simply refuse to increase governments borrowing limit and will dare Obama to default on US debt and shut down government services. The media will report this as a principled stand (and not something that could lead to another recession as they do now).

Obama will negotiate by offering more concessions on Social Security and Medicare. The GOP will refuse all such offers. Finally, a version of Simpson-Bowles will be introduced as the centrist solution. Obama will say that each side got something they wanted and obviously no one could have gotten everything they wanted.

Democrats will complain about the intransigence of the Tea Party Republicans. They will tell their base that it was the best they could do when faced with such a terrible adversary. They will point to some minor victories in the package, something like the retirement age being 68 instead of 69.

And that will be that.

This is so often repeated that in November, Greenwald had a formal summary of the process.

This is also why I was suggesting before the elections that Obama is better placed than Romney to make people swallow this bitter pill. And that is why (with the exception of a couple of crazies like Sheldon Adelson and Koch brothers) the bulk of the 1 percenters liked him very much.

He just delivered on that.

By allowing the GOP to hold on to the borrowing limit threat he essentially ensured that a Grand Bargain that reflects the priorities of Peter Peterson will be signed by March.

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