A Quick Public Choice Take on the Fiscal Cliff Deal

I agree with pretty much everything Marc has to say on the deal below. (For my own thoughts, see here.) Nevertheless, from a political point of view, something very like this deal was inevitable.

First, the Republicans held a bad hand. All the Bush tax cuts were going away, so they had very little leverage. The only leverage they had was over letting unemployment benefits, stimulus tax credits, and corporate welfare expire, and letting the sequester take effect immediately. However, Republicans are scarcely fonder of the sequester than are Democrats, both because of its cuts to defense and because of the blunt, across-the-board nature of the domestic discretionary cuts. As soon as the negotiations turned to dealing with taxation and spending separately, Republicans were never going to get significant spending cuts out of a taxation deal, because they had very little to offer Democrats on taxation. In the end, Republicans got a higher income threshold for tax increases, but paid for it with extensions of the foregoing expenditure programs.

Why were Republicans not willing to give a little more on tax increases on the rich in exchange for cuts in tax expenditures? Here the optics play a role. Pushing hard to let the low-income and higher ed tax credits expire could easily be demagogued. Letting extended unemployment benefits expire when Republicans continue to insist that the economy is weak would also be jarring. On the corporate welfare side, the diffuse-costs, concentrated-benefits logic applies in full force. Besides people who read sites like this one and the concentrated interests who benefit from such programs and spend literally hundreds of millions of dollars a session lobbying for them, no one cares about corporate welfare, and many even think of it as “pro-business” (as I’ve read journalists oh-so-neutrally describe them in articles on the deal) and therefore somehow pro-recovery.

Now, if this analysis is correct, then in two months when the spending side of the fiscal cliff is dealt with, Democrats will hold a similarly weak hand, and we should look for essentially zero Republican concessions on taxes. If the outcome deviates from this prediction in either direction, then we will have good reason to think that extraneous factors, such as “negotiation skills,” played some kind of role.(*) But I would look for the Nash Equilibrium to obtain.

(*) Another possibility, of course, is that I misread the (House) GOP’s preferences. They may hate defense spending cuts so much that they are willing to allow more tax increases to prevent them. That would, of course, be a perfectly awful outcome from a limited-government perspective — and therefore very much within the realm of possibility.