Yes, It Looks Very Much as Though the Austerity Bomb Is Going to Go Off...
With five days to go… Republicans and Democrats… can barely bestir themselves to maintain the pretense that they’re working to avoid the $600 billion of tax hikes and spending cuts due to arrive next week. President Obama is flying back from Hawaii tonight to keep up appearances. But almost nobody expects a deal before Jan. 1. Negotiations essentially ended after John Boehner’s Plan B fell apart…. As the political scientist Jonathan Bernstein noted:
[N]ot only do liberals believe that the expiration of Bush-era tax rates gives them a bargaining advantage, but many Republicans may well prefer that outcome as well. I think if there was any information generated by the Plan B fiasco, it might have been just that: some Republicans really would prefer an eventual outcome that involves relatively higher tax rates as long as they don’t have to make an affirmative vote for it.
That strikes me as exactly right, although I’d characterize the Republican motivation slightly differently…. [A]ll recognize that taxes will rise on Tuesday… to their Clinton-era levels…. Plan B… called on House Republicans to cast a career-threatening vote to raise taxes… [but] the cliff would do the dirty business of raising taxes for them if they just waited a week…. [O]nce rates reset, Republicans (and Democrats, too) would find themselves in the much more comfortable position of negotiating tax cuts for the vast majority of Americans. Given this reality, the question to ask in the days and hours leading up to the fiscal cliff is not whether the two parties will strike a deal, but why they would want to.
Why would the parties want to? How about this. Running up to the explosion time of the austerity bomb has already reduced likely year-2013 real GDP growth from 3.0% to 2.5%. If no deal is reached until June 30 then our likely year-2013 real GDP growth rate will be -0.5%. And each day from January 1 to June 30 the damage to the year-2013 economy is roughly linear: each day a deal is delayed the year-2013 likely real GDP growth rate falls by 0.0084%--and that is if a deal is ultimately reached that would have held the economy harmless in 2013 had it been reached on November 10.
