The Fiscal Cliff has been averted postponed, if not made worse.
- Senate Majority Leader Harry Reid has once again proven himself to be incapable of leading the Senate. Is there any stronger rebuke than McConnell’s appeal to Biden as he searched in vain for a negotiating partner in the Senate?
- The Democrats have done what was once unimaginable: they made permanent the much-decried Bush tax cuts for all but the wealthiest households. The talking heads spent much of the last few months noting that if Obama had any mandate from the 2012 elections, it was the mandate to raise taxes on those making about $250k. So much for mandates.
- A Republican controlled House is not much of a counterweight. Let us assume that McConnell was successful in getting the best deal he could out of this Senate (recall the tax cuts). The GOP-controlled House could have responded with a bill that combined the tax cuts with significant spending cuts, thereby forcing a compromise. But Boehner et al blinked (and Ryan, once believed to be a force for fiscal stability, no longer has a claim to this title). Ah yes, but they lived to fight another day. Of course, is there any real evidence that their capacity to fight will improve with a reduced majority?
- In terms of long-term fiscal sustainability, the Congress arrived at the worst possible solutions: tax cuts and increased spending. Although there were early discussions of entitlement reforms—ranging from means testing Medicare to changing the calculation of the cost of living adjustment for future benefits—in the end, Congress made matters worse by preventing scheduled reductions in rates paid to doctors under Medicare. And although there were early discussions of cutting tax expenditures, a series of existing expenditures were extended.
- By placing a two-month hold on forced sequestration, Congress not only made things worse but also assured that the winter and early spring will look remarkably like the past few months. I am somewhat surprised that Biden negotiated, and Obama accepted, this decision. Whatever chances the President had to make some significant policy changes in the early days of his second term seem diminished greatly. Immigration reform, assault weapon bans, etc., will be difficult to achieve when all attention is focused on the next fiscal cliff and the debt ceiling. Moreover, if there were any belief that this would somehow help the economy, it is ill founded. There is little to suggest that the credit rating agencies, investors, or firms looking for regime stability will find anything resembling a silver lining in this deal. Quite the opposite.