Is the fiscal cliff a $600 billion bluff by Obama?
“President Obama’s commitment to top marginal rate increases is unshakable,” financial executives with the (supposed) inside White House skinny tell Politico’s Ben White. And Erskine Bowles is telling folks this morning that “the probability is we’re going over the cliff,” at least initially.
So, clearly, a reelected President Obama is not to be trifled with, and the GOP must cave on taxes, right? Not so, says Keith Hennessey, former economic adviser to President George W. Bush:
This conventional wisdom makes three key assumptions.
1. The President’s top economic policy priority is his fiscal policy goal (raising taxes on the rich).
2. In a veto / no bill / blame game scenario, the President can shift most of the political blame to Republicans.
3. He will make his veto decision on these two bases: fiscal policy and relative political blame.
Key flaw in the conventional wisdom: The President’s veto decision is not about tax increases or political blame; it’s about causing a recession in 2013. I make different assumptions.
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.
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.
Hennessy, shorter: Obama wants more out of his second term than an $800 billion tax hike on the rich. And a nasty, unpredictable recession just three years after the end of the Great Recession would be politically and economically calamitous. Obama is bluffing on his veto threat.
Maybe. Then again, I think raising taxes on wealthier Americans and business is central to the long-term Democratic goal of raising taxes on everyone. First things first. Also, Team Obama might not fear a second recession as much as Hennessey thinks. Here’s how the Congressional Budget Office describes the economic impact of going over the fiscal cliff:
If history is a guide, such a contraction in the economy in the first half of 2013 would probably be deemed a recession by the National Bureau of Economic Research. … The economic outcomes that CBO expects, under current law, for the first half of 2013 strongly resemble mild recessions that occurred in the past. It bears emphasizing, however, that economic forecasts are very uncertain. Many developments, including the evolution of banking and fiscal problems in Europe and the speed at which the U.S. housing market improves, could cause economic outcomes to differ substantially, in one direction or the other, from those CBO has projected.
Scary enough? I dunno. CBO’s baseline forecast shows that after a “mild recession,” the economy would return to growth with GDP growing 3.1% in 2014, 4.8% in 2015, and 4.5% in 2016. Those would be the best three years of the entire Obama presidency for growth. And while unemployment would initially spike, it would average 6.7% in 2016 — again, the best of the Obama presidency.
Does Team Obama believe the CBO forecast, or will it worry more about the “uncertain” consequences the CBO mentions? And, of course, Obama just got easily reelected despite a lousy economy. Maybe he doesn’t think a downturn would “dominate” his second term. Anyway, maybe implementing Obamacare, expanding regulations, and — perhaps — adding a justice or two to the Supreme Court would be enough. Another recession wouldn’t affect any of that stuff. Plus more of a focus on foreign policy.
I still don’t think Obama is bluffing, but Hennessy does make me think the odds are greater than I previously thought.