Obama and the Fiscal Cliff

Will Obama give way on taxes, or will the House GOP, or will neither? The president's press conference didn't shed much light. He seemed to signal both willingness and unwillingness to bend.

Spirit of compromise:

With respect to the tax rates, I -- I just want to emphasize, I am open to new ideas. If the Republican counterparts, or some Democrats, have a great idea for us to raise revenue, maintain progressivity, make sure the middle class isn't getting hit, reduces our deficit, encourages growth, I'm not going to just slam the door in their face. I want to hear -- I want to hear ideas from everybody. [Emphasis added]

No surrender:

Well, two years ago [when all the Bush tax cuts were extended] the economy was in a different situation...

But what I said at the time is what I mean, which is this was a one-time proposition... [W]e cannot afford to extend the Bush tax cuts for the wealthy. What we can do is make sure that middle-class taxes don't go up...

If we get that in place, we are actually removing half of the fiscal cliff... And what we can then do is shape a process whereby we look at tax reform -- which I'm very eager to do...

So there is a package to be shaped... But what I'm not going to do is to extend Bush tax cuts for the wealthiest 2 percent that we can't afford and, according to economists, will have the least positive impact on our economy. [Emphasis added.]

Not being a mindless austerian, I think the main thing is to avoid going over the cliff. (Even if it's a slope, really, not a cliff, starting down it is still very dumb.) As before, as always, a win for both sides is easily available, if each would settle for less than outright defeat of the other: Cap deductions and increase revenues collected from the rich (in absolute terms and as a share of the total) without raising rates. If pride won't let that happen -- we aren't dealing with rational problem-solvers here -- one side or the other will have to cave. From a macroeconomic point of view, it doesn't matter which. I'd settle for either, as long as we avoid an abrupt EU-style fiscal tightening.

In the worst case -- i.e., the outcome that a significant number of partisans on both sides are spoiling for -- neither side surrenders, the fiscal squeeze begins and the economy turns back down. Politically, the question is then who gets the blame. The Republicans, probably, as the Dems are betting -- but it's not certain.

Obama's right to say that voters elected him knowing that a rise in tax rates for households making $250,000 and above was a central part of his campaign. Actually, that's putting it too modestly: It was his only specific promise. So one can see why he's reluctant to give in. But a lot depends on how Republicans now play their hand. Suppose they agree to tax changes that give the White House significant revenue and shift more of the tax burden up the income distribution, without raising rates. If Obama refused to settle for that, he'd be insisting on an increase in the top marginal rate not to serve a substantive purpose but as an end in itself -- and at the cost of higher unemployment too. Not exactly statesmanlike. The blame in that case might well be shared around.

Obama may be calculating that Republicans lack the wit or self-discipline to make a strong offer of that sort (and he'd probably be right). Going over the cliff therefore inflicts the greater damage on the GOP. Of course, the means of hurting the enemy is to hurt the country, but politics is a tough business.

Naive question: In this scenario, which side is the hostage-taker?