Fiscal Cliff-jumping

US President Obama and US House Speaker Boehner

The fiscal debate has taken center stage in the markets. Partially because as we are counting down the last days of 2012, we are in the middle of the holiday season with relatively little news from Europe. The news vacuum makes the still major debate all that more important. The other thing is, well, we are counting down the last days of 2012, and it’s the last chance to reach some sort of resolution. The major question remains:

Who’s Thelma, and who’s Louise?

From a purely economic standpoint, which is where the market is most comfortable, it makes sense not to go over the fiscal cliff, or slide down the fiscal slope, or jump in the fiscal quagmire, depending on which metaphor you choose. The consensus seems to be that reaching some sort of agreement is the best thing for the country, if at the very least only to give some sense of certainty. Even the two major factions debating the issue agree that it would be bad for the US to go over the fiscal cliff.

With so much agreement, how come there is so much disagreement?

It’s a serious problem. Let’s start a campaign!

Politics. Specifically electoral or partisan politics. Making fun of politicians is remarkably easy, especially if you are targeting the ones doing things you disagree with. So, I’m going to try to refrain from doing that. In fact, I’m going to come out and say that I think that both President Obama and Speaker Boehner are genuinely interested in doing what’s best for America. They are, at the end of the day, very decent, exceptionally intelligent people, despite their dayjob as politicians.

The problem is that the competitive nature of politics forces each side to focus more on “winning” than what’s necessarily better for the country. If Boehner were to accept Obama’s proposal, the press would spread headlines far and wide about the President’s “victory” over the House. If the reverse were to happen, and the White House accepted the Republican proposal, the media would lament Obama’s “capitulation”. It’s called horse race journalism.

Of course the essential problem is that both Republicans and Democrats are right about cutting spending and increasing revenue (or taxing the rich). But that’s not the debate that’s happening on Capitol Hill. The debate isn’t about what needs to be done -if you listen carefully to interviews given by both Geithner and Boehner, they clearly understand what needs to get done. The problem is that in the world of politics, who did the right thing is much more important than that the right thing was done.

Let’s forget the economics of it for a second, and think of this as a political strategy on both sides. From the Republican side, they feel they can “win” the argument, because they believe that Obama does not want the country to fall over the cliff. They know it’s bad for the country, and they expect to “force” him to do the right thing. They can then go back to their constituents and reassure them that they can do their job. Republicans are interested in reducing taxes and cutting spending. They feel they can stare down the fiscal cliff, because if the US goes over it, they get their spending cuts. Then they will be in a better position to negotiate tax breaks.

From the White House perspective, the important element is to raise taxes on the rich, and continue tax breaks for people making less than $250,000 a year. The thing is, if the country goes over the cliff, they also get what they want; i.e. taxes will automatically go up for the rich. Thus, the White House will be in a better negotiating position after Jan 1st, because there won’t be any opposition to their proposal to lower taxes on the less well-off. They feel they can blame the Republicans for any ill effects of going over the cliff, and come out “winners”.

In politics, it’s just as effective to make the other side lose as it is to win; the end result is the same. Even though neither side wants to go over the cliff, it just might be more politically expedient to do so. Which brings us back to the original question, who’s Thelma and who’s Louise?

And remember how they held hands to the very end?

While Democrats and Republicans argue over who’s at the wheel, the fact remains that America is the car. Or they’re both playing a game of fiscal chicken, and they are both driving the same car. Whatever image works best for you. The thing is, though, once they’ve each stared down the other until the deadline; they can each claim their respective victory. While going over the cliff in the long run is a bad thing, not much will happen for the first few days. By making the deadline such a big deal, it allows them to come to an agreement just on the other side. Like I said, despite being politicians, Obama and Boehner aren’t stupid or evil and they will resolve the fiscal cliff problem. It’s just that politics has a way of doing things that just doesn’t make sense to investors. Or voters.

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