The fiscal cliff deal was a bad compromise

In a good compromise, the matter at stake is redefined in such a way that everybody gets a little of what they want. Nobody gets everything, but everybody wins something. A good compromise essentially a positive sum game.

By this standard, the recent fiscal cliff compromise is a bad compromise.

In summary, it goes something like this: the Republicans got to eliminate many scheduled tax hikes and the Democrats got to prevent most spending cuts. Since both sides got something, why isn’t this up as a good compromise? 

Because it was bad for the US economy.

The biggest economic threat facing the United States today is runaway federal spending. Unless something serious is done in the next few years, there will be a painful crisis involving hyperinflation, a collapsing dollar followed by rising interest rates. At that point, spending will have to be curtailed radically, regardless of how much it hurts. The sooner this cutting is done, the more it can be done in a controlled fashion, and the less it will hurt (though at this point, no matter how it is done, it will hurt).

With Obama ensconced in the White House and implacably opposed to any spending cuts, the so-called fiscal cliff was the one opportunity to cut spending before it is forced upon the American people by events. The scheduled cuts would have been modest ($100 billion per year, out of a $3.8 trillion budget), but they would have been something. And they would have happened, because they were already baked into the cake by a pre-existing bipartisan compromise.

Unfortunately, these cuts were negotiated away. As a result, there will be no spending cuts until it is too late.

Also unfortunately, the averted tax increases will do little to grow the economy. This is because only middle class tax rates were saved. With regard to taxes, middle class tax rates have very little effect on the economy. The kind of tax cuts that boost economic growth are those on the rich. Why? Because the rich have the freedom to either productively invest their income or to sit on their cash. When tax rates go up, they sit on their hands. When tax rates go down, they invest, creating jobs. New jobs have the multiplicative effect of decreasing entitlement spending while increasing income tax revenues. But this won’t happen because the tax rates on the rich will now go up.

The end result is a slight increase in federal spending while economic growth (such as it is) will be tamped even further. Instead of making the pie bigger, the pie just got a smaller. Why did this happen? Because Democrat politicians like Obama were motivated by a false dogma, and Republican politicians were motivated by short-term thinking.

What could the Republicans have done differently?

They could have thought long instead of short. As I have said before, in politics, he who frames the debate wins the debate. The MSM journalists had framed the debate in terms of a ‘fiscal cliff’, as if something terrible was scheduled to happen in Jan 1. In reality, what was termed ‘a fiscal cliff’ was really a ‘bipartisan compromise’. The GOP should have explained the dire need to cut spending (even at the cost of some tax increases). And they should have explained that Obama’s hostility to smaller government meant that this was one of the few opportunities to actually cut spending, because those cuts had already passed into law (by bipartisan agreement).

There should be no mistaking it, Obama’s trillion dollar deficits combined with Helicopter Ben’s printing press are an extremely dangerous trend. If Boehner and the House Republicans don’t have the votes – or the gumption – to stop them, they should at least manoeuvre things so that these horrible policies are clearly monopartisan when the crash comes – and it is coming. One of the great things about Obamacare and the stimulus was that Obmamacare was entirely monopartisan and the stimulus was mostly monopartisan. If Boehner were truly playing the long game, he would be setting the GOP up to politically benefit from the coming currency crash. If he were smart, he has the opportunity now to set the Democrats up for the defeat of a lifetime.

But he isn’t that smart.

Comments

[WiseGuy]

Time for Boehner to go.

[bmatkin]

Cinn. You're wrong on this one in a way. The GOP has no ability to frame any debate. They have no spokesperson for the entire party. Obama speaks for democrats and has the gravitas (a least to his fawning media) to get his voice heard loud and often.
Nobody really listens to Boehner. He is dead in the water before he even opens his mouth.
The key is to just simply not negotiate with Obama. Pass single item bills or short bills that simply stick it to him. Announce the bills to the public and then go home.
Let Obama and Reid find some way to deny military payroll (which might be tied to a DOE money withdrawal.)
Let Obama veto a civil service bill that pays fed. employees.
That's how you win. If he can't negotiate he can't even propose anything else.
Is he going to veto pensions in order to increase funding to the food stamp program or his immigration executive orders?/ I think not.