Fiscal Cliff Poker: Call Obama's Bluff!

The president and the speaker of the House are playing poker.  The imagined stakes are whether we go over the "fiscal cliff" on January 1, 2013.  The actual stakes are the direction of the country -- whether we will see any GDP growth, put our people to work, and get out of the doldrums of the past four years, and whether the president will be able to demoralize the Republican Party and make it easier to take the country farther left.

There have been several good suggestions for compromise along the lines of Simpson-Bowles.  (See for example Glenn Harlan Reynolds's advice in USA Today.)  However, even if the suggested strategy worked, which is not a sure thing, deficits would continue for many years into the future.

Some pundits think the president will gain most of what he wants by "going over the fiscal cliff."  Taxes will go up for just about everyone, and sequestration cuts Defense more than any other part of the budget.  The theory is that the president then gets to blame the tax hike on the Republicans.  He can then propose a "tax cut" for those making less than $200K per year and blame any failure to pass that on the Republicans, too!  Meanwhile, the sequestration budget cuts amount to only three percent of spending over the next decade, so we have almost status quo ante with a little more tax revenue for a year or so if the economy doesn't take a nosedive.

Some other pundits say that the president can't risk going over the fiscal cliff because the shock to the economy will be too great and may leave him mired in recession and/or very slow growth for the bulk of or the whole of his second term, ruining his chances of a positive legacy.  Moreover, it is not clear that everyone or even a large minority will agree that it is the Republicans that are at fault for going over the fiscal cliff.

The speaker is unable to produce a majority (even with Democrats) that will agree to the president's demand that tax rates be raised on those making more than $200K per year.  The speaker probably could produce a majority to close loopholes, lower tax rates, and bring in more revenue.   This becomes even more of a problem because the president proposes that the corresponding spending cuts are pushed off and spread out over several years in the future.  So even if the speaker wanted to give in on the raising tax rates point, he realistically can't.

So it looks like the president's hole card can be played only if the Republicans do not surrender and we go over the fiscal cliff.  He then proposes a "tax cut," as described above.

But the speaker has a better hole card, and he can show it before we go over the fiscal cliff and play it for keeps afterward.  The president already suspects that this hole card exists, and he is already nervous about it.

The hole card is the debt ceiling.  The play before the cliff is to outline what things will look like if the president refuses any compromise on tax rates, loopholes, and spending cuts.  There will be sequestration affecting defense, in particular, and "discretionary spending."  There will be a tax hike for everyone.  The "payroll tax holiday" will end, the tax rates for all brackets will rise, and other adjustments will increase the effective tax even on the lowest-paid workers.  In addition, all of the new taxes in ObamaCare will become effective.  All this additional drag on the economy will tend to further reduce the currently anemic growth rate and may result in a return to recession as the new year develops.

At this point, the House of Representatives will refuse to extend the debt ceiling.  This will implement the spending cuts that the president wants to avoid, and while he will win some new revenue -- if the economy doesn't contract further -- he will experience the inability to do anything else for the remainder of his term in office, or at least until after the next midterm election.

Refusing to extend the debt ceiling will stop deficit spending.  It will force the president and Congress to cooperate to decide how to allocate shortages.

Contrary to what Democrats might say, it is in fact possible to run the government, defend the country, and even pay Social Security without borrowing any money and loading our excess on our children and grandchildren.  Not increasing the debt ceiling will make us be more responsible.  And most of all, it will send a message to domestic and foreign markets that we intend to be responsible.  This will tend to increase GDP even in the face of the tax hikes that will take place on January 1, 2013.  It provides an end-run around the tax hike vs. spending cut impasse that has plagued us for the past four years.  Moreover, it will effectively put an end to bailouts and other misuses of federal money, since there won't be any excess for that kind of expenditure.

It has become apparent to even the casual observer that absent a drastic measure like capping the debt ceiling, we are going to continue spending beyond our means.  We are going to continue selling our birthrights and those of our children and grandchildren because of our own timidity in the face of the failure of our federal elected officials to do the job they were elected to do.

We need to draw a line in the sand and prevent ourselves from crossing it.  We can do it in a few months by actually capping the debt ceiling.  I ask the speaker to count his votes in the House.  If there is support for this course, he can send it to the president and see if the president wants to compromise.  One way or another, spending is going to have to go down.

Jeff Scribner is president of ASI Enterprises, Inc. (www.asienterprises.com), an investment bank serving small and medium sized businesses.  Contact him at jscribner@asienterprises.com.

The president and the speaker of the House are playing poker.  The imagined stakes are whether we go over the "fiscal cliff" on January 1, 2013.  The actual stakes are the direction of the country -- whether we will see any GDP growth, put our people to work, and get out of the doldrums of the past four years, and whether the president will be able to demoralize the Republican Party and make it easier to take the country farther left.

There have been several good suggestions for compromise along the lines of Simpson-Bowles.  (See for example Glenn Harlan Reynolds's advice in USA Today.)  However, even if the suggested strategy worked, which is not a sure thing, deficits would continue for many years into the future.

Some pundits think the president will gain most of what he wants by "going over the fiscal cliff."  Taxes will go up for just about everyone, and sequestration cuts Defense more than any other part of the budget.  The theory is that the president then gets to blame the tax hike on the Republicans.  He can then propose a "tax cut" for those making less than $200K per year and blame any failure to pass that on the Republicans, too!  Meanwhile, the sequestration budget cuts amount to only three percent of spending over the next decade, so we have almost status quo ante with a little more tax revenue for a year or so if the economy doesn't take a nosedive.

Some other pundits say that the president can't risk going over the fiscal cliff because the shock to the economy will be too great and may leave him mired in recession and/or very slow growth for the bulk of or the whole of his second term, ruining his chances of a positive legacy.  Moreover, it is not clear that everyone or even a large minority will agree that it is the Republicans that are at fault for going over the fiscal cliff.

The speaker is unable to produce a majority (even with Democrats) that will agree to the president's demand that tax rates be raised on those making more than $200K per year.  The speaker probably could produce a majority to close loopholes, lower tax rates, and bring in more revenue.   This becomes even more of a problem because the president proposes that the corresponding spending cuts are pushed off and spread out over several years in the future.  So even if the speaker wanted to give in on the raising tax rates point, he realistically can't.

So it looks like the president's hole card can be played only if the Republicans do not surrender and we go over the fiscal cliff.  He then proposes a "tax cut," as described above.

But the speaker has a better hole card, and he can show it before we go over the fiscal cliff and play it for keeps afterward.  The president already suspects that this hole card exists, and he is already nervous about it.

The hole card is the debt ceiling.  The play before the cliff is to outline what things will look like if the president refuses any compromise on tax rates, loopholes, and spending cuts.  There will be sequestration affecting defense, in particular, and "discretionary spending."  There will be a tax hike for everyone.  The "payroll tax holiday" will end, the tax rates for all brackets will rise, and other adjustments will increase the effective tax even on the lowest-paid workers.  In addition, all of the new taxes in ObamaCare will become effective.  All this additional drag on the economy will tend to further reduce the currently anemic growth rate and may result in a return to recession as the new year develops.

At this point, the House of Representatives will refuse to extend the debt ceiling.  This will implement the spending cuts that the president wants to avoid, and while he will win some new revenue -- if the economy doesn't contract further -- he will experience the inability to do anything else for the remainder of his term in office, or at least until after the next midterm election.

Refusing to extend the debt ceiling will stop deficit spending.  It will force the president and Congress to cooperate to decide how to allocate shortages.

Contrary to what Democrats might say, it is in fact possible to run the government, defend the country, and even pay Social Security without borrowing any money and loading our excess on our children and grandchildren.  Not increasing the debt ceiling will make us be more responsible.  And most of all, it will send a message to domestic and foreign markets that we intend to be responsible.  This will tend to increase GDP even in the face of the tax hikes that will take place on January 1, 2013.  It provides an end-run around the tax hike vs. spending cut impasse that has plagued us for the past four years.  Moreover, it will effectively put an end to bailouts and other misuses of federal money, since there won't be any excess for that kind of expenditure.

It has become apparent to even the casual observer that absent a drastic measure like capping the debt ceiling, we are going to continue spending beyond our means.  We are going to continue selling our birthrights and those of our children and grandchildren because of our own timidity in the face of the failure of our federal elected officials to do the job they were elected to do.

We need to draw a line in the sand and prevent ourselves from crossing it.  We can do it in a few months by actually capping the debt ceiling.  I ask the speaker to count his votes in the House.  If there is support for this course, he can send it to the president and see if the president wants to compromise.  One way or another, spending is going to have to go down.

Jeff Scribner is president of ASI Enterprises, Inc. (www.asienterprises.com), an investment bank serving small and medium sized businesses.  Contact him at jscribner@asienterprises.com.