The Chicken Game

Keith Hennessey says that the president is bluffing about vetoing any resolution of the “fiscal cliff” that doesn’t include a tax increase:

  1. If there is no bill, the U.S. economy will probably dip into recession for much/most/all of 2013, and it’s impossible to predict whether such a recession would be short-lived.
  2. A 2013 recession would be terrible for the country and terrible for the Obama Presidency. It would limit the President’s options across his entire policy agenda, economic and non-economic. And it could define and dominate his entire second term.
  3. President Obama believes #1 and #2, and therefore avoiding the risk of triggering a recession with his veto is an even higher policy priority than his fiscal policy goal.
  4. The President wants to get things done. He cares more about his own chances for policy success (across the entire breadth of his agenda, whenever he figures out what it is) than he cares about relative political blame. A scenario in which Republicans get most of the blame for a veto-triggered recession is still a loser for him if it means he can’t accomplish his second term goals.

while Robert Reich thinks the Republicans are:

Obama’s only real bargaining leverage comes from the fact that when the Bush tax cuts expire at the end of December, America’s wealthiest will take the biggest hit. The highest marginal income tax rate will rise from 35 to 39.6 percent (for joint filers), and the capital gains rate from 15 to 20 percent.

This will happen automatically if nothing is done between now and then to change course. It’s the default if Republicans won’t agree to anything else. It’s Obama’s trump card.

In all honesty I don’t understand why the president is so insistent about the tax increase for the highest income earners. $40 billion in revenue will do almost nothing about a $1 trillion deficit. It won’t make it any more (or less) sustainable. It’s not a start, a downpayment, or blazing the trail forward. Fulfilling a campaign pledge? So what? He’s not running for anything.

Don’t get me wrong. I opposed the “Bush tax cuts” when they were enacted as cutting the wrong taxes at the wrong time. I opposed them in 2010 when they became the “Obama tax cuts”. Indeed, that made me ill because it indicated pretty clearly that the Congressional Democrats had just been kidding when they railed against them all those years. They didn’t really giveadamn.

The estimates I’ve seen are that the harm that letting the tax cuts lapse would be small and short-lived just as the benefit to the economy they provided was small and short-lived. As I’ve been saying all along. If you’re worried about taking that money out of the economy, enact more efficient tax cuts. I’ve suggested any number of them.

BTW, I think the video clip above has several morals. First, whoever isn’t bluffing is the one who dies going over the cliff. Second, if you’re going to play “Chicken”, don’t dress fashionably.

And it’s better to have dirt on your hands than blood on your hands.

16 comments… add one

  • One of the best scenes ever filmed. But not one I’d like to be part of.

  • jan

    After reading this article over at Politico it appears that a fiscal framework is emerging to avoid the consequences of our out-of-control government spending. It’s would more aptly be called, ‘Republicans caving, democrats grinning.’

  • TastyBits

    My guess for the reason for the insistence on raising tax rates for the rich is moral not monetary. It is the logical conclusion to the philosophical underpinnings of the left. If you believe that the rich got rich unfairly, it follows that the money gotten through those unfair means should be returned.

    On the right, I would liken it to abortion. If you believe abortion is murder, not paying for an abortion is moral not monetary. Taxes are more a monetary issue.

    Whoever is seen as the cause for going over the cliff will pay a steep political price. Usually, the Republicans are deemed unreasonable, but if they could appear reasonable, President Obama could be blamed.

    The problem is that the Republicans do not seem to understand how the game is played, and whining about the rules is a losing strategy. The game never stops.

  • jan

    TastyBits,

    A pragmatic analysis of the left and right.

    Considering how little this tax raise on the 1-2% would yield, in relationship to our daunting fiscal problems, it does seem more a vehicle of ratcheting up class warfare than a genuine applicable debt/deficit remedy. Dave mentions a 40 billion revenue haul, while I’ve heard more like 75-80 billion, which in terms of running the government is something like 8-10 days. It has been commonly termed a ‘drop in the bucket,’ and yet is the singularly most talked about ‘plan’ in the dem playbook! Take the raising-taxes-on-the-rich part out and what is left in their medicine bag? Like Drew dropped in and added, where are the spending cuts part of the budget-revision equation?

    I also agree that the republicans don’t seem to have a clue as to how to play the game. They are like children in their negotiations — putting tax revenues on the table along with dem promises of spending cuts and/or entitlement/tax reforms, and then dreamily await the dem to fulfill their end of the bargain — which rarely if ever happens. The republicans then complain about being lied to, and, in the meantime the public points their fingers at the republicans, leveling all the blame their way, as the dems happily skip away, virtually unharmed, setting their sights on yet another round of government strip poker.

  • Drew

    Hennessey’s position is that Obama is bluffing because he full well knows the policies he advocates will create recession. The political consideration is that this will hamstring him.

    The “lets go over the fiscal cliff” crowd is calling Obama’s bluff, because the Republicans believe (know) that this will result in recession.

    What is the apprppriate response?

    I have a hard time coming to grips with the notion of political blustering that causes recession and unemployment (read: suffering) by the Average Joe.

    But I also have a hard time coming to grips with “middle of the road,” “balanced,” “bipartisan” crappola that doesn’t deal with economic realities today for the benefit of the politicians of the day…………………just to end up with the Average Joe in the same predicament tomorrow.

    I say let it burn. I’m currently involved in a nasty workout with one of our portfolio companies. Kick the can down the road strategies have been suggested. Me: deal with it now, or deal with it (probably from greater weakness) later. Lets have at it.

    Go over the cliff, or deal with spending, Republicans.

    Obama is an incompetant manager and financier, but a great pol. They are backing away as we speak from spending to just focus on the populist “tax the rich” BS. I say hold their feet to the fire on both spending and taxes. An incompetant electorate just voted the guy in, they will not get past the soak the rich rhetoric. Their ignorance is exposed. The Republicans need to hold firm and make the Dems and their voters own the election and its implications.

  • The estimates I’ve seen are that the harm that letting the tax cuts lapse would be small and short-lived just as the benefit to the economy they provided was small and short-lived. As I’ve been saying all along. If your worried about taking that money out of the economy, enact more efficient tax cuts. I’ve suggested any number of them.

    While this is probably true for the highest income earners what about raising taxes for the middle class and also the spending cuts?

    From a fiscal standpoint we might very well be better off in the long run if we go over the cliff. Wont be fun, but then neither were the recessions in 1980/1981, but the world did not cease to exist.

    I would like to see improvements made to the tax code. Instead of simply letting the Bush tax cuts expire, clean up the code and look for other revenue sources. Of course, I see the probability of that happening as being zero.

  • Steve Verdon:

    According to this report from the CRS, the entire macroeconomic impact of going over the “fiscal cliff”, i.e. letting all of the tax cuts elapse and letting all of the spending provisions lapse, is estimated to be between a .9% and 5% decrease in GDP. Mark Zandi says 1.8%.

    The impact of letting just the tax cuts on highest earners elapse would be .1% (same source).

    Yes, that would do real harm to real people. So will what we’re doing. So will what might be done. What I asked in an earlier post is which would be worse?

  • jan

    Go over the cliff, or deal with spending, Republicans.

    More and more people seem to be siding with facing our fears, rather than giving in to some temporary bandage, appealing to mainly the uninformed, disengaged masses. The election, for me, was a directional tipping point. IMO, we went in the wrong direction, with the wrong person, to address our immediate fiscal problems. Negotiating a luke-warm deal, with a short term fiscal salvation, is not helpful for the bigger problems looming over us. So, deal with it now, let the pain begin for everyone. What is mutually shared is also mutually acknowledged, with greater joint effort to seek more viable, long-lasting solutions.

    I would like to see improvements made to the tax code. Instead of simply letting the Bush tax cuts expire, clean up the code and look for other revenue sources.

    However, that would be looking at our financial weaknesses through a business or sound budgetary prism, rather than just making the best political moves to advance a certain ideology, which is how this administration operates and high-fives it’s wins.

    I have openly not been a Newt Gingrich fan. Nonetheless, he does have clarity in these remarks: House republicans should stop negotiating with Obama.

    “I give Obama great credit for this. I have never seen anybody better at finding trivial distractions in order to avoid responsibility,” Gingrich said.

  • jan

    Another POV, taking into account three cliffs: The fiscal cliff, the debt cliff, and the political cliff.

  • TastyBits

    @jan

    In the game, nothing is what it appears to be. What you say and what you do should not be consistent. Spin all you want, but never lie. Also, requiring sentences to be parsed equates to lying.

    In the game, a player would talk about making the rich “pay their fair share”, but he would never actually do it. If a player’s party held the Senate, House, and Presidency, he would never pass tax hikes to accomplish what he said that he would do. He would wail and gnash his teeth, and he would reluctantly extend the hated tax cuts for the greater good.

    The Democrats will never make the rich “pay their fair share”. If they really were going to soak the rich, they would eliminate tax deductions, but Congress is full of rich Democrats. Rich Democrats use every tax deduction available, and when they need to shield more money, new “tax incentives” are created.

    The answer to the Democrats tax rate increases is to couple it to tax deduction decreases. Raise the top rates to 39%, and cap tax deductions at $50k. If you know some rich Democrats, propose this plan to them.

  • jan

    Raise the top rates to 39%, and cap tax deductions at $50k. If you know some rich Democrats, propose this plan to them.

    Our accountant is a wealthy democrat who mused about voting for Romney/Ryan, but ended up going for Obama. That will be a question well worth posing to him.

    In the meantime, I think Romney’s plan of lowering tax margins for all, coupled with tackling and eliminating deductions (or capping them, like at $50K, as you suggested) favoring shelters for the ‘rich,’ makes more sense.

  • Andy

    In all honesty I don’t understand why the president is so insistent about the tax increase for the highest income earners. $40 billion in revenue will do almost nothing about a $1 trillion deficit. It won’t make it any more (or less) sustainable. It’s not a start, a downpayment, or blazing the trail forward.

    I agree, but on the other hand, one could ask basically the same question about the Republicans opposed to this, who act like this small tax increase is the end of the world. Why are both sides vociferously fighting over what is, in reality, a marginal change in the tax code? Their dogmatic fight prevents them from even talking about areas where they probably agree and could get easily get much more that $40-60 billion. Heck, the DoD saved $30 billion this year alone just through efficiencies, all by itself! That’s just one department that made some pretty small adjustments that were relatively painless.

    This is why I’m a man without a party. The “Titanic” difference between them amounts to hardly anything at all except a BS adherence to “principles” which are anything but. It’s disgusting.

  • jan

    agree, but on the other hand, one could ask basically the same question about the Republicans opposed to this, who act like this small tax increase is the end of the world. Why are both sides vociferously fighting over what is, in reality, a marginal change in the tax code?

    Andy,

    There is an axiom which fits the reasons why the R’s are at least putting up some kind of resistance to a selective tax increase for a few and none for the rest. It’s more than just principle dictating this, it’s human behavior.

    What you permit you encourage.

    In other words, the R’s allowing this ‘small’ tax increase on the rich, won’t end the political infighting, opening discourse in other areas such as entitlement/tax reform. This tax increase is more symbolic than anything else, as It won’t even dent the deficit or debt. All it does is give a sense of power and accomplishment to the dems, that they have diminished the resistance of their political opponents. Having gotten this increase, they will ask for more. After all, taxation is all the social progressives, aka democratic party, seems to have in their suggestion box of how to enhance government revenue. I also think as revenues from the rich become increasingly insufficient to handle the burden of increased government spending, they will lower that $250,000 mark, going after a newly defined class of ‘rich’ people who dwell in lowered income brackets.

    Also, republicans have been the party who at least have opened up conversations regarding medicare/medicaid reform. During the summer they tried to have meetings regarding this end-of-the-year cliff, the sequestration mandates etc., but the dems wanted no part of it. They still don’t. All they want is to increase taxes, and continue dividing the country into special interest groups clamoring for their own special needs to be given special attention. The wholeness or growth of the country is taking a back seat preference in these current debates. And, while both parties at times seem equally clueless and/or inept, I see the dems as digging into their ideological stances, while blaming the other party for their ‘obstruction’, the most.

  • Andy

    There is an axiom which fits the reasons why the R’s are at least putting up some kind of resistance to a selective tax increase for a few and none for the rest.

    So the GoP would put up less resistance if the tax increases were broader?

    In other words, the R’s allowing this ’small’ tax increase on the rich, won’t end the political infighting, opening discourse in other areas such as entitlement/tax reform. This tax increase is more symbolic than anything else, as It won’t even dent the deficit or debt.

    The GoP aren’t bystanders in this and their fight is just as symbolic. The GoP, like the Dems, are fighting for symbolic principles that are out of sync with the real world. We need politicians and parties who do more than count coup on marginal policy issues.

    All they want is to increase taxes, and continue dividing the country into special interest groups clamoring for their own special needs to be given special attention. The wholeness or growth of the country is taking a back seat preference in these current debates.

    And one could say the same thing about the GoP except change the “all they want” part to rate reductions.

    I’m sorry Jan, but I think the GoP is playing political games as much as the Democrats. And given the history of what the GoP actually did under GWB I don’t believe they are any less in thrall to “special interests” nor do I think they are operating in a way that is consistent with the best interests of this country.

  • TastyBits

    @Andy

    … Why are both sides vociferously fighting over what is, in reality, a marginal change in the tax code? Their dogmatic fight prevents them from even talking about areas where they probably agree and could get easily get much more that $40-60 billion. …

    Everybody assumes the first leads to the second. If the second leads to the first, things make a lot more sense. Whenever one party gets total control, they forget to enact their platform, and the faithful will twist reality to excuse the behavior.

    When you think like a hustler, the incomprehensible suddenly becomes comprehensible.

  • jan

    The GoP aren’t bystanders in this and their fight is just as symbolic. The GoP, like the Dems, are fighting for symbolic principles that are out of sync with the real world. We need politicians and parties who do more than count coup on marginal policy issues.

    Andy,

    First off, IMO, no particular party has clean hands. They all seem manipulative and/or using hyperbole to stress the points they want to make.

    However, I do see an important difference in special interest division of the parties.

    The republicans, treat the country more as a whole and blended one — the melting pot it was Constitutionally designed to be. They tend to lump everyone together and then divide the sum into marginal categories, if you will — “A rising tide lifts all boats” kind of philosophy, rather than separating the boats into sizes, shapes, colors, types, in order to address their placement in the water. This kind of equality, though, has become a detriment to them, mainly because of how the dems cater to subsets of people — dividing them up as to their particular issues, and then seemingly giving those issues special attention, making that group feel more understood by the dems than the republicans make them feel.

    Additionally, the dems, both openly and subtly, demagogue who is good and bad in these groupings Being of color is good. White is bad. Unions are good. Employers/bosses are bad. Women are good. Men are secondary. Rich is selfish. Poor are meant to be subsidized. Illegal’s are to be given rights. Legals are subject to having those rights diminished. Being dependent and secular is a wave of the future. Being self reliant, independent or religious-minded is part of the past. Finally, democrats are empathetic and good. Republicans are cold-hearted and bad.

    In a way we have gone backwards into a format of political/cultural segregation, whereas tribal interests trump those which are more integrated ones. We are rapidly becoming a nation of individual and separated swatches, rather than all cohabiting one colorful quilt striving together for a common good, regardless of physical, ethnic, gender, or socioeconomic differences.

    For instance, during this past election NOW bombarded me with excited emails saying that my reproductive rights would be subject to reversal should the republican candidate win. Consequently I was encouraged to support Obama. I wrote back saying that my concerns were a sum of many issues, mostly economic, and that I was insulted to think they assumed most women could be cajoled by such a narrow self-interest to vote for the dem candidate. I must be unique, though, because so many women I’ve talked to were swayed by these exaggerated and mainly false claims, and voted for reproductive reasons rather than what is really capsizing this country — the lack of jobs and economic malaise.

    As of now, with Obama back in the driver’s seat, just look at the solutions the dems are putting forth to fix our economy — tax the rich, mulling over another stimulus package (raising the deficit), withdrawing more land for energy exploration/development, adding more regulations to business, and crickets on any tax, entitlement reform, or spending cuts.

    I just don’t see this as the antidote for what ails us, in making us a stronger more unified country.

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