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Thursday, November 15, 2012

Obama Negotiates – Not

 

 

At his press conference yesterday, the President said (again) that Step Number 1 in the cliff negotiating process is to have Congress pass the middle class tax extension (<$250k).  Obama said that after the middle class cut was signed into law, he would negotiate with Congress on all of the other issues that are on the agenda for the end of the year. I, for one, don’t believe a word of that offer. If Congress were to agree on those middle class cuts, Democrats would no longer negotiate on the remaining issues, they would dictate the outcome.

The President’s words:

 

 I won’t pretend that figuring out everything else will be easy

 

“Easy”? I would say “impossible” is a better description. If the middle class tax cuts are signed into law, the Democrats will not give an inch on the rest of the critically important issues. Who’s kidding who?

 

In the end, there will (probably) be some agreement that will result in taxes on wealthy American’s going up, while middle class taxes rates are held at the Bush era levels. But the idea that Republicans, and the 48% of the people who did not vote for Obama, should grant the middle class some tax bennies prior to getting an understanding on all of the other items that are on the fiscal cliff, is just silly to me.

 

The other day, Democratic Senator Patty Murray (WA) spoke about allowing the country to fall off the cliff. Murray (and presumably Obama) believe that Republicans would crumble when the consequences of the “cliff”  crush the Republican political base. Her words:

 

“If the Republicans will not agree with that (preconditions for negotiations), we will reach a point at the end of this year where all the tax cuts expire and we’ll start over next year”

 

 Senator Murray wants to play hardball. So does the President. Both are insisting that Republicans bend over and agree to “fix” one aspect of the fiscal cliff prior to the end of the year, and then push off addressing all the remaining issues to sometime in 2013, maybe, possibly, no promises though. The thinking by Obama and Murray (and many other Democrats/liberal pundits) is that they have all of the bargaining chips on their side of the table.

 

I think that Murray and Obama have it backward. If the US does fall off the cliff, then it will be the Democratic base that will have its ass handed to it.

 

-The under $250k Bush tax cut would go away. This would be a middle class disaster. It would cost the 97% a whopping $223 billion in take-home pay in 2013.

 

-The AMT would hit people with incomes of > $50K. The IRS puts the number of new taxpayers who will get hit with the AMT at 30m. 97% of those poor folks are in the middle class today.

 

-Payroll taxes go up on 1/1/13. That will cost the average family $1,700; this is a very “regressive” tax increase. The cost to middle class workers will be another $112 billion in lost take-home pay.

 

-Unemployment insurance benefits would be cut. 

 

 

I think the President has made a very dangerous move in the game of chess that is called the fiscal cliff. I don’t think Republicans will agree to give Obama the one thing he has insisted on without getting an agreement on all (or most) of the other issues. The “Reds” would be stupid if they did that.

 

I don’t know where Obama learned his negotiating skills, but he needs a tutor. I think the odds are very high that House Republican’s say “No”, and do not give Obama what he wants. If Boehner (or some other big shot Republican) says “no” at (or after) this Friday’s meeting, the odds of falling off the cliff will shoot through the roof.  Markets will respond accordingly.

 

The market reacted appropriately to the President’s press conference yesterday. It fell like a stone after he reiterated his demand that Congress fix one thing today, and leave everything else blowing in the wind. The US stock market has lost more than $1Trillion since the election. A significant portion of that loss is attributable to the President’s insistence that his horse goes before the cart.

 

Maybe the election results give Obama the right to negotiate using the tactic, “My way or the highway”. But I don’t think Obama really has the stick he needs to beat Republicans into submission. At some point he will be forced to recognize that his bare knuckle fighting style is going to get his Administration bloodied, and bring his base of supporters a world of hurt.

 

Comments

  1. Bruce-

    I think you are misreading Obama. I think Obama is more than happy to fall off the cliff and that his attitude is ‘Either you give me a big win up front or I take a big win when we fall off the cliff.’ It’s clear from the election that:

    1) Most of the public has absolutely no understanding of basic economics
    2) Obama is good at playing the blame game and attributing bad outcomes to the other side.

    After all, if people don’t see mega successful / competent businessman Mitt Romney as clearly better for the economy than community organizer / redistributionist Obama than there’s a real problem in understanding.

    I think Obama sends us off the cliff and then uses hardship as red meat to rile up the base in non stop class warfare. It fits his playbook and I think Dems do just fine in this environment as their base completely buys into their ‘hang the rich’ platform. The more suffering the easier a sell that seems to be.

    In the long run I’m not sure what can happen to avoid our turning into Greece. The Reps have sensible economics but an otherwise bad playbook. The Dems have a winning demographic strategy that will take us to Greece within a generation.

    • Hrm…maybe we have a different opinion on what “class warfare” means. ‘Cuz I don’t see this so-called war making the lives of “the poor” or middle class any better. The numbers would bear that out should one bother paying attention, but, hey, “Non stop class warfare” must be in the eye of the beholder…or the Fox news watcher, I s’pose.

      • So any thought you don’t like you tie to Fox News? There is something called ‘history’ that should not surprise us that a Marxist community organizer fake constitutional scholar will absolutely play the race and class cards. He thinks he can’t lose, but we will absolutely lose.

  2. disagree

    if we fall off the cliff, democrats will say republicans did it, the media will say republicans did it, and that will be the end of it. republicans did it.

    after four years of this, how could anyone possibly disagree

  3. I think the US is headed for economic collapse, just like Greece. And Obama either doesn’t care or more likely he wants it that way.

    Every mentor the guy has ever had, from his father to the priest/minister in Chicago who kept screaming “G#d Damn the United States!!!!” — every one of Obama’s mentors have hated the US.

    As the saying goes, the apple doesn’t fall far from the tree.

  4. I can’t really see any changes in the next 4 years. The fed is printing QE to infinity and beyond. We are still murdering people over seas. We have more people on food stamps now then we did 4 years ago. Our unemployment and housing situation is not changed and we are on the verge of a stock market crash. If the markets crash again do you realize how much more money baby boomers will lose this close to retirement? They have already lost 30-50% of their portfolios in 2008-2009. Some of it was gained back but not much. I think Congress and Obama are not that clueless to let this happen again. If we do go off the fiscal cliff then we are going to have a lot of economic problems from a retirement standpoint. If baby boomers cannot retire it is going to crowd out the young adults from getting work. On the other end we need to invest the money we are printing into programs that will increase our standard of living and that produce technologies that will pay dividends in the future. Those with a high financial intelligence will continue to thrive in the environment.
    http://thebasicsofliving.com/understanding-cycles/

    • Jim,MtnViewCA,USA says:

      RobMcC, to be precise, a falling stock market hurts Dems because government union employees pension funds are tied up in stock portfolios. Otherwise, the pain suffered by private citizens is a lesser concern.

      Agree that Repubs will likely cave, they always do.
      First the Dems will strip the rich. This only works to solve the problem for one year. However, it does smash an alternate base of power.
      Next the Dems will collapse the military. This is insufficient to solve the problem, spending for entitlements has to be resolved. However, anti-military plays well to the base.
      At this point, the stage will be set for the real, intended-all-along solution.

      • Jim-

        Disagree. Falling stock market hurts their constituents but helps Dems because they blame it on the fat cats and rally the base. Dems strategy is basically all class warfare at this point and they win if people suffer but can be convinced that it’s some rich guy’s fault. Obama ran his whole campaign around this point. I have to say it was absolutely surrealistic to see Romney’s massive success in business become a liability in the campaign.

  5. Calif is a good lesson in what happens to the Republican Party that constantly pledges “no new taxes” they lose the ability to be part of modern political life. The other issue is that the Republican power is only in the House and they have lost seats during this election cycle the idea that all Republican members of the house have the same political base sounds unreal. The other issue is that the President has the wind at his back from the election and can and will use the media to beat the Republican House members into submission as Clinton did during the Republican shutdown no contest from an media access point of view which is critical.

    • @ron — “Calif is a good lesson in what happens to the Republican Party that constantly pledges “no new taxes” they lose the ability to be part of modern political life.”

      Try doing a tiny bit of research or use google before writing such an uneducated and ignorant comment.

      California Proposition 13 (1978) was a taxpayer initiative — it was not a product of either political party.
      http://en.wikipedia.org/wiki/California_Proposition_13_(1978)

      As for your “analysis” of the media, the most important thing the media covers up is: more Americans get their news from Saturday Night Live and Leno than from any network news service. Newspapers became irrelevant years ago. Howard Stern and Rush Limbaugh dominate radio. That is not an endorsement of any of these shows, its a fact confirmed by dozens of media rating agencies that the media’s ability to control public opinion is greatly exaggerated. No one is listening.

      Obama’s control over traditional media is as important as Momar Ghaddafi’s was. Your idea of “modern political life” might be centered around the Washington Post’s OpEd. Most people are concerned with Twitter or Facebook or their favorite blogs.

      Modern political life has become irrelevant. Public service is an oxymoron. They are the most selfish and corrupt entity in a country with a lot of ethical shortcomings.

      Throughout history, “power of the purse” is what has always mattered. No matter which crooks are in the White House or Congress, Uncle Sam is now bankrupt. That is making officials and government bureaucrats increasingly desperate — which is why we are seeing more and more abuses of power. Cornered animals lash out. Frustration and anger grows. Desperate and detached political leaders try to clamp down harder and harder against basic freedoms and human rights.

      It doesn’t matter whether Obama or Romney “won” — the US cannot afford the bloated government we have now, much less the bone headed ideas Washington DC would like.

      Power of the purse matters, and Uncle Sam’s purse is at least $17 trillion in the red (before counting off balance sheet liabilities)

      • There seems to be a tone in this thread that someone is going to win and someone is going to lose. It seems more likely that there will be a compromise (yes, that word which is barely uttered these days). Earlier this week, David Brooks spelled out one possible route to a compromise. There are others. Part of the problem is that Republicans haven’t put forth a program other than “Cut taxes and let the market take care of itself.” Isn’t that what got us to 2008? At the same time, the Democrats have been fairly cryptic in their proposals–there’s a need (some might describe it as desperate) for massive overhaul of our infrastructure. Just look at the Grid, or the FAA, and the need is clear. What about the education system–a lot can be done locally, but there needs to be some national agreements on structure. Having a community college offering a 3 year associates degree in California and one offering a 2 year one in NY (assuming the same course load each semester) doesn’t work. Then there are our capital markets; yes, there are problems, but continuing the “I want it all my way” that we’ve seen for the past 4 years doesn’t work either. If the country goes over the cliff, neither political party will fare well. A stormy economy sinks all boats. And it seems no one is much interested in learning from the lesson of 1937, when pre-mature austerity resulted in a 66% crash of the stock market.

        • Also, Pelosi comes from California, where 250K hardly defines rich. No one wants to crater the housing market in either NorCal or SoCal. I expect Pelosi, for all of her liberal concerns, to modify the cut off. There will likely be a wholesale rewrite of the tax code, the mortgage interest deduct will be phased out, and the AMT will disappear. That’s what the compromise will look like, and there’s a little there for everyone.

        • @david — “And it seems no one is much interested in learning from the lesson of 1937, when pre-mature austerity resulted in a 66% crash of the stock market.”

          Seems you have forgotten that the Fed caused the credit bubble in the 1920s, trying to monetize WW1 debts and Woodrow Wilson’s global meddling / arrogance

          You also seem to be parroting your political re-education instructors. Are you certain that the Fed caused the 66% crash in stocks in 1937? That is what Krugman and other Keynesians have told you to think, and its great that you are obeying.

          But can you rule out all other causes — say the stock market anticipating Hitler’s invasion of Austria in March 1938? How about Hitler essentially throwing out the Versailles treaty in ’37? Building an army in ’36 and placing troops along the border with France? Building a navy in the same year that led to Britian’s policy of appeasement?

          Are you absolutely certain the US “recovery” in 1937 was real, only to be threatened by what you were told to think was pre-mature austerity? Because many people alive at the time, who didn’t drink the Krugman Kool-Aid, think the 1930s was the Great Depression and the economy stunk the whole time. Many historical facts seem to get in the way of the Princeton economics department’s political indoctrination.

          John Maynard Keynes, unlike Krugman and bernanke, favored counter-cyclical policies. Deficits during recessions, but surpluses (what you falsely label as austerity) in good times. Strange how the wanna-be Keynesians always leave out the surpluses part of true Keynesian theory

      • @Bubba: Prop 13 was 34 years ago and most likely will be revised during the current political cycle to revise commercial property standards. Currently the Republican party is now down to less then 30% registration in the State and has completely lost any say in Sacramento.
        The Republican Party today is a toxic mix of Old Southern Dixie Democrats and social conservatives a bad omen for the Parties long term political life. Go back and look at GOP platforms in 1960, 1964 and 1980 and its devoid of social conservative footprint but the 2012 platform looks closer to the John Birch Society political wishlist.

        Calif is in fact a strong indication of what’s ahead for the Republican Party that caters to social conservative causes and uses the Bible belt for its electoral strength.

        • @ron – ” Currently the Republican party is now down to less then 30% registration in the State and has completely lost any say in Sacramento.”

          How do you figure a minority party with “no say in Sacramento” has control over taxes or spending? If what you say is true, it would implicate the party in control — ie the Democrats — for tax & spending problems in California

          What does Old Southern Dixie democrats have to do with California? If you knew what old south dixie means, you would know California isn’t part of the old south. All your hatred is blinding you to the indisputable fact that Bible belt is again NOT IN CALIFORNIA.

          You are full of ridiculous partisan hatred, and rather empty on basic facts and logic.

          California VOTERS chose to impose tax restraints on Sacramento via prop 13 (1978). No matter how much you hate the Republican party, as a minority party they would be in no position to impose tax cuts. If anything, the majority party would have been complicit

          Try getting some anger management therapy

        • Ron:
          Enjoy your trashing of the Republican party. Your state will file file for bankruptcy before 2016. Send a postcard to your beloved Dems thanking them for that. I am sure they will appreciate it. They have completely ruined the state of CA.

          C.

  6. But What Do I Know? says:

    Um, I believe that what Obama is doing is called negotiating–he doesn’t want to give away the store until he gets Boehner and McConnell into that little room. What the politicians say in public is merely kabuki; and it doesn’t matter what happens before they get into their card game.

    • They are “negotiating” about who should command the Titanic after it hit the iceberg.

      Statutory tax rates don’t matter, and rhetoric aside they cannot raise effective tax rates anywhere near enough to meet existing promises, never mind all the spending they want to do. Once the US government hit a debt ratio over 90%, it lost relevance in geopolitics as well as domestic life.

      Desperate and weak leaders trying to save face is not “negotiating”. At best it is nostalgia, at worst it is head in the sand denial.

      The truth is: none of these people wants to be the first to admit that Washington DC is slowly circling the drain. It is Govt Motors in the 1970s — a dominant market position in decline. Rather than face the truth and make tough choices, a privileged and isolated bureaucracy is going to run GM and Uncle Sam into the ground.

      Remember the “quality” of all those over-priced, wood paneled, gas guzzling station wagons? Remember the “quality” of government services after Hurricanes Katrina and Sandy? Check out the “quality” of public schools that use political indoctrination to impose quack “science” like creationism and global warming. Check out the crumbling transportation infrastructure. Check out the CFTC, SEC, Fed, Treasury, FHA, Justice Department, etc (plus duplicate bureaucracies in most state governments) that did a bang up job regulating banks. Or the spectacular success of the FDA in keeping defective drugs off the market or getting effective drugs tested.

      Discussing which over-priced, wood paneled, gas guzzling station wagon to build is not a “negotiation”, and it doesn’t matter who “wins”

  7. Bruce –

    As always, great analysis. However, what about the long term? To play devil’s advocate, why shouldn’t we take our medicine now instead of kicking the can down the road?

    • Rob-

      Printing money is politically expedient and takes care of all problems. Expect it.

    • Tempting. But as a number of others have stated, the risk is a repeat of 1937.

      The USA has to grow. It can do that via inflation, or real economic growth. If it does not grow, then the debts will overwhelm us.

      All this talk of cutting spending and raising taxes is useless unless there is growth of at least 3% on a sustained basis. There is nothing on the horizon that looks like that. 1-2% is a better estimate; half what is needed to dig out of the hole.

      I think that “austerity” (another word for the fiscal cliff) will have the same results that Spain is suffering from. When growth falls, unemployment rises, tax receipts go down and the deficit rises. Same in the US. It is a vicious circle.

      Anyway, I don’t think that 2013 is the year to slam on the brakes (and take our medicine). I think tapping on the brakes is all that is necessary right now. Next year another “tap” will be required.

      To me, the size of the debt is less of a problem than the rate of change of the debt. The rate of change was out of control the past four years. I want to move debt growth to less than 3% of GDP. We are about 7%. now.

      • “The USA has to grow. It can do that via inflation, or real economic growth.”

        Doesn’t it grow via “debt”? I mean, money doesn’t just magically appear via capitalism, it only seems that way to the guy running a business or worker getting paid. No, given our system, it has to be *created*…either by the Fed/Treasury via gov’t debt or via a bank through loans. Right? I mean, that’s just reality. Either way, it’s debt!

        Say all you want about how it should work, but isn’t that how it actually happens??

        • Bruce and John -

          Not sure how this statement:

          “Printing money is politically expedient and takes care of all problems. Expect it.”

          Printing money = creating debt and letting the Fed buy it = inflation. Expect it. The debt won’t really be debt only because the Fed will keep printing money to buy it and hold it. The treasury will then owe the Fed a lot of money. Gov spending puts that money into circulation. At some point that debt will be forgiven. That’s Q infinity.

  8. so true and so well thought out

  9. The market was long overdue to drop, and already tanking, before the election. Fiscal cliff doesn’t factor at all, maybe some selling in advance of capital gains increases helps but it’s all predictable via simple techincal/sentiment analysis and would be happening even if Romney won.

    Those who say the Republicans get the blame no matter what are correct. I hate Obama and am against any tax increases for any reason, but in this case he’s finally doing something the right way and acting a little like a leader.

    • Acting like a leader? You mean by giving everyone free handouts, bullying business and not realizing we are becoming Greece? That’s great leadership!

  10. One thing for certain, politicians never say what the mean.

  11. The Second American Civil War began on November 7, 2012. Perhaps 1 person in 1,000,000 took note of the event. But, begin it did. And for most of the same reasons ( control of the U.S. economy ) and with the same rumblings ( “secession” ) that begat the first American Civil War. The Second American Civil War will pit East against West, instead of North against South. There will be – sadly – casualities; yes, real casualties dying from real bullets and other damages of war. And – sadly – when it is over, there will be NO “reunification” as there was after the first American Civil War. United States of America – R.I.P.
    And somewhere, Santayana will be laughing hysterically.

  12. You fools, what did you expect when you re-elected Obama. Hes pulling the old rope-a-dope on the Republicans and they are dumb enough to fall for it. Boehner is the leading Republican dunce and drunk.
    The Halls of the Federal Government are infested with vermin now. What do loyal and Constitution loving Americans do now? Is there any strong leaders left on America’s side?

  13. “Senator Murray wants to play hardball. So does the President.” -BK

    What kind of ball do Republican’s play? McConnell brazenly announced in public that his highest priority was to deny Obama a second term, and the Republicans in Congress mounted a total legislative blockade against Obama. That is hardball. Boehner and other Republicans continue to refuse to consider any tax increases, even ones that would only effect households in the top 3% of income, despite the fact that the Bush tax cuts (as predicted) have blown a huge whole in the budget. That is hardball. Republicans were willing to risk the Federal government defaulting on its debt, and a credit downgrade, in order to coerce the Democrats into going along with their priorities. That is hardball.

    I’m no expert on negotiation, but when the opposition is as intransigent as the Republicans, don’t the Democrats have to play hardball to get any of their priorities accomplished?

    “If the US does fall off the cliff, then it will be the Democratic base that will have its ass handed to it.” -BK

    It’s true that expiration of the Bush tax cuts will hit the middle class (and thus the economy) very hard, unless some/most of them are reinstated early next year. Obama’s proposal would make 80% of the Bush tax cuts (in dollar terms) permanent. But if Republicans refuse to raise taxes on the rich, maybe voters who don’t already know it will finally understand that the Republicans are for the rich, and big business, and no one else. They want low taxes on the rich, lax regulation and subsidies for their cronies in big business, and they want to cut social insurance programs that are vital for households in the middle and lower income strata to have a small measure of financial security. It is not class warfare to say this; it is simply acknowledging reality.

  14. I think what will happen is that they will get to the end of the year without a deal, although much posturing about trying hard to get one. On the first day of the new session, the House will pass something like the middle class tax cut, maybe using 500 instead of 250 as the threshold, the Alt Min fix, and maybe add a CG / dividend rates of 20%. They will a day or two later fix the defense sequestration. And they will do nothing about discretionary sequestration. And that will be brilliant. Because Obama has made such a focus of raising rates on the wealthy, and nothing else, he will have a hard time accusing the GOP of obstructionism. They will have given him what he made a big deal out of. It will be very hard to change the position and say, yeah, taxes on the wealthy are going up but we still want more. Patty Murray can splutter all she wants but when they get that bill, the Dems are going to have to move fast to pass something before the taxes start being deducted. If they hold it up over spending, they make themselves vulnerable.