Balance of Power

President Obama and Speaker Boehner are back behind closed doors after a week of posturing that moved slightly in the president’s favor toward higher taxes. While the president uses every tool he’s got to pound his tax hike position, Republicans try to hold their coalition together while negotiating publically, so far unsuccessfully, with the White House. However, regardless of some openings in Republican ranks, compromise on a cliff-avoiding measure remains a long-shot with strong ideological anchors firmly set on both sides.

In an interview with Bloomberg, the first since his re-election, President Obama said “America is poised to take off” He then said, “Let’s make sure that we don’t have a self-inflicted wound, because there are a lot of silly games played up on Capitol Hill. The ‘silly games’ the president refers to are tax rates and the debt ceiling, which happen to be the only bargaining chips available to Republicans who want to rein in runaway government spending. The unfortunate use of the word ‘silly’ is not very conciliatory tone and it belies an attitude toward the balance of power voters obviously demanded.

In public, Mr. Obama has insisted that Republicans give up on both their negotiating levers of taxes and debt ceiling, before he will consider cuts to entitlement spending. He believes the extra revenues will close enough of the deficit to give him some maneuvering room. He says he will only consider changes to the tax code and cuts to entitlements once the crisis has abated.

Republicans and most economists on the other hand, believe that the most significant part of America’s budget gap is the spiraling cost of ‘Social Benefits’ programs, otherwise referred to as entitlements. They are absolutely right, but that is not what is being talked about now. Taxing the wealthy at 100% of income will not come close to closing the budget deficit caused by rapidly swelling entitlement programs.

While Republicans have issued proposals and indicated a willingness to increase tax revenues (so far not rates) in return for significant entitlement cuts, President Obama has not budged. His constant tax hike message and effective use of the bully pulpit have moved a few Republicans toward his position of increasing rates, but only if they can get cuts in spending. He’s also solidifying his liberal congressional base with his no-compromise tax hike message.

The players in this drama have not changed since the election, but the dynamics and the calendar substantially favor the president. That said, a significant number of Republicans, especially Tea Party and other like-minded conservatives seem quite willing to die politically in what they see is a worthy cause rather than to surrender any longer to an incessant growth of regulation and debt.

Whether conservatives choose the cliff or the debt ceiling as their last stand remains to be seen. But Speaker Boehner isn’t waiting for vote counts to act. He recently fired a few of the more outspoken conservatives from prized committees to make examples of them and to rein in control his base.

The election revealed what a terrible job conservatives did of controlling their own message of fiscal and social responsibility. They allowed Democrats to paint them as heartless and single-minded protectors of the rich and they paid a huge price for it. But even amidst continued withering criticism from the bully pulpit, the media, governmental agencies, and ‘twitterized’ voters, they remain steadfastly resolute and focused.

Yesterday, Senator Jim DeMint (R, SC), a leading conservative who helped the tea-party gain influence on Capitol Hill, announced he was leaving the Senate in January to lead the conservative Heritage Foundation. DeMint, a tea-party icon believes that the GOP’s leaders have pursued compromise at the expense of ideals. He said “”This is an urgent time, because we saw in the last election we were not able to communicate conservative ideas that win elections.” At Heritage he will help re-craft that message.

Undoubtedly, that new message will almost certainly be aimed at the largely Catholic, hardworking, family-oriented Latino population. Governor Romney could have won the election had he gotten just a part of George Bush’s share of the Hispanic vote. In 2004 Bush was down by only 9% in that demographic compared to Governor Romney’s loss of 44%. The reason was largely attributed to how alienating the primary debates on immigration were for Latinos. Watch for significant changes in how the Republican Party reaches out to this significant group.

So as one considers the political landscape, the balance of powers, the potential outcomes range between and include a cliff dive and a grand bargain between President Obama and Mr. Boehner. But given the deep seated ideological divide on both sides, passage in both houses is a long shot.

We have not heard much from the Democrats because so far they get what they want. They have not yet been challenged by any movement by the president toward Republican demands for entitlement cuts, though some in their ranks have acknowledged the need for them.

In his Bloomberg interview, Mr. Obama didn’t rule out some of the alternatives Republicans are floating on tax compromise and he said “I don’t expect Republicans to agree to any plan where they’re just betting on the come that entitlement reform will happen.” That sounds positive.

There could be any number of potential outcomes, but they essentially break down this way:

  1. Failure to reach agreement, but both sides see enough progress to extend a modified version of the Bush tax cuts (some rate hikes) and postpone sequestration (budget cuts).
  2. Grand bargain reached by the Mssrs. Obama and Boehner, with 50/50 odds it makes it through Congress.
  3. Impasse reins and we go over the cliff. Tax rates rise for all tax payers. Worse, 4 million new taxpayers would experience the confiscatory horrors of the Alternative Minimum Tax for the first time (according to the IRS yesterday) and the Pentagon prepares for massive across-the-board cuts which will impact more than 100,000 jobs initially. The likelihood of recession rises significantly with this outcome.

In a Bloomberg interview former Fed Chairman Alan Greenspan said “the presumption that we’re going to have a painless solution to this [US debt problem], I think, is fantasy. There are a lot of risks out there but the one thing I can be reasonably certain of is we won’t get through this whole issue without some pain.” He was referring to higher taxes and the possibility of recession.

In the year’s remaining three weeks Congress must grapple with the expiration of the Bush tax cuts, expiration of long-term unemployment insurance, expiration of annual tax extenders (how Congress addresses outdated taxes), a fight over last years’ tax extenders, expiration of the payroll tax holiday, oh and a vote on raising the debt ceiling. This whole thing has ‘kick the can down the road’ written all over it, but who knows? It’s why we play the game, right?

While the ‘games’ in Washington seem ‘silly’ or a waste of time to many, thank goodness for them. Thank goodness for opposition. Thank goodness for balance of power. While the struggle seems ugly and dysfunctional in public, it is precisely this elegant design of government that forces compromise. It tempers the majority party, forcing them to hear and address the other side of the argument; the objective ‘cost’ of their charted course. Better decisions – compromises result.

The real game is going on now, as it should given the scarce time remaining, behind closed doors. There is no time for the proper working of congressional committees required for major legislation, so it is likely we will see a two stage-deal to avoid the cliff and allow time for the proper working of Congress on major issues such as tax reform and entitlement spending cuts.

On this December 7th, Pearl Harbor Day, we thankfully remember all of our World War II veterans and all American soldiers and veterans who offer their lives for this great country so we might continue our way of life and promote the balance of power throughout the world.