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March Madness

The fiscal cliff was just a warmup.

Jan 14, 2013, Vol. 18, No. 17 • By IRWIN M. STELZER
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Economists with the unenviable job of guessing about the economy’s path in 2013 and beyond must decide whether the coming battles over the direction of the country will prevent the feeble recovery from accelerating, or perhaps even throw the nation into a recession. So far, so good, if the euphoric reaction of the markets to the cliff deal is any indicator, although to attribute the share-price jump solely to a pullback from the edge of the cliff is to ignore the fact that share prices in years past typically have risen on the first day of trading, and to ignore the analysis of Bill Gross. The highly respected founder of PIMCO, which has $2 trillion in assets under management, says that the rise in stock prices has less to do with the cliff deal than with Japan’s decision to reflate and the Fed’s policy of continuing to run the presses overtime.

Also on the plus side is a reduction of the uncertainty about tax policy. Believers in the new certainty say we will have tax peace in our time, or at least for the next few years, because Obama would not dare to insist on further increases as part of any future fiscal deal. Indeed, as he seeks to shape his legacy, and the Republicans attempt to avoid disasters in the 2014 and 2016 elections, a “grand bargain” seems to become more plausible.

That bargain would be achieved, optimists say, without massive spending cuts or tax increases that would dampen economic growth—no current pain, lots of future gain. Faced with a need to get the deficit under control, politicians will make the long-term fixes needed to reduce the projected cost of health care, pension, and other entitlements. Higher-income Americans will be required to cover a share of their Medicare costs, increases in pension payments will be based on a slower-rising and more accurate cost of living index, and tax reform will rake in billions by eliminating loopholes in the tax code. These “fixes” will enhance confidence in the nation’s future, without making a dent in current activity, and encourage foreigners to continue buying our IOUs. All will be for the best in this best of all possible worlds.


Perhaps. But many of the politically savvy folks here in Washington very much doubt that 2013 will be the year of the grand bargain. For that to happen the president would have to admit to himself, and then force the nation to confront, the consequences of looming entitlement spending, and persuade his party that entitlement reform is not inconsistent with Democrats’ historic support for an expansion of the welfare state. On the other side, Republicans would have to accept more wealth redistribution than they like, for that is what means-testing of benefits is, and what “tax reform” really means.

Surely, none of the events leading up to last week’s deal suggest such a bargain is in the offing. It took substantial arm-twisting by Vice President Joe Biden to get Senate and House Democrats to agree to move the level at which taxes would go up from $250,000 to $450,000 for families, and they remain sullen if not mutinous. In the course of the negotiations Senate Democrats even refused to change the inflation index for Social Security to a more accurate, slower-rising index, although the president had said such a change makes sense. Or even to consider increasing the age at which certain entitlements will become available, even if that change were to affect only those Americans still far from retirement. In short, the left has yet to be persuaded that there aren’t enough “rich” people to pick up the bill for the lavish entitlement buffet that liberal politicians have laid before them.

Republicans are even less likely to make the concessions needed for a grand bargain. Only a minority of House Republicans voted in favor of the cliff deal, and as the 2014 primaries loom, even fewer will sign on to any tax increases the president demands. Speaker John Boehner, who voted for the deal, is also likely to hang tough in the March negotiations. He knows that his majority leader, Eric Cantor, a man who has a lean and hungry look, voted against the deal as a predicate to a leadership challenge. For the moment Cantor has decided to sheath his blade, but another display of reasonableness by Boehner might make the Ides of March a troublesome day for the speaker.

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