If you ask Barack Obama or Mitt Romney, or merely wander in front of a television when they are speaking, they will confidently tell you the same thing: This election poses a fundamental choice to America. And they are right. America is struggling to pull out of its deepest economic crisis in 80 years. The past four years have unleashed a raw, bitter war over economic class, our social obligation to the poor and sick, and the basic sustainability of the modern state that has existed since Franklin Roosevelt. Various events have conspired to compress the decisive battles of the war into a brief period at the beginning of the next year, in what will likely be an atmosphere of economic crisis. “2013,” says Paul Ryan, correctly, “is the magic year that determines how all this gets resolved.”
But when you press the candidates to explain just how it is they could escape the muck that has ensnared Obama the past two years, they descend into mushy platitudes. Romney promises “leadership in Washington that will actually bring people together and get the job done, and could not care less if it’s a Republican or a Democrat”—at most a mild Republican retreat from Obama’s aggressive reforms, or perhaps even a reprise of Romney’s often liberal tenure in Massachusetts. Obama, for his part, has offered up an even less plausible scenario, which is that, even though Republicans in Congress responded to his 2008 victory by becoming even more radical than they were under George W. Bush, winning a second election will beat the crazy out of them and usher in a new era of legislative compromise and good feelings.
It seems natural to conclude from all this vapid, buoyant patter that neither candidate has a plausible blueprint to avoid political gridlock, and that, whoever wins, the stalemate of the past two years will grind on into the next four. President Obama would still likely face a Republican House, and President Romney a Senate in which Democrats can mount a filibuster. Yet all the signs suggest both candidates do have strategies in mind to prod the creaky machinery of Washington to life and effect the dramatic change they vaguely but ardently promise. In fact, shortly after the next Inaugural Ball—perhaps very, very shortly after—the great stalemate between socialism and social Darwinism will break open and likely turn decisively in one direction or the other.
For different reasons, the candidates cannot openly describe these plans to the voters. But the clues are everywhere.
Let’s first imagine that, on January 20, Romney takes the oath of office. Of the many secret post-victory plans floating around in the inner circles of the campaigns, the least secret is Romney’s intention to implement Paul Ryan’s budget. The Ryan budget has come to be almost synonymous with the Republican Party agenda, and Romney has embraced it with only slight variations. It would repeal Obamacare, cut income-tax rates, turn Medicare for people under 55 years old into subsidized private insurance, increase defense spending, and cut domestic spending, with especially large cuts for Medicaid, food stamps, and other programs targeted to the very poor.
Few voters understand just how rapidly Romney could achieve this, rewriting the American social compact in one swift stroke. Ryan’s plan has never attracted Democratic support, but it is not designed for bipartisanship. Ryan deliberately built it to circumvent a Senate filibuster, stocking the plan with budget legislation that is allowed, under Senate “budget reconciliation” procedures, to pass with a simple majority. Republicans have been planning the mechanics of the vote for many months, and Republican insiders expect Romney to use reconciliation to pass the bill. Republicans would still need to control 50 votes in the Senate (Ryan, as vice-president, would cast the tiebreaking vote), but if Romney wins the presidency, he’ll likely precipitate a partywide tail wind that would extend to the GOP’s Senate slate.
One might suppose that at least a handful of Republicans might blanch at the prospect of reshaping the entire face of government unilaterally. But Ryan’s careful organizing of the party agenda has all taken place with this vote as the end point, and with the clear goal of sidestepping any such objection. When Republicans won control of Congress during the 2010 elections, Ryan successfully lobbied the party to take a vote on his budget plan the following April. The plan stood no chance of passage (given Obama’s certain veto) and exposed dozens of vulnerable House members to withering attacks over its unpopular provisions. So why hold a vote carrying huge potential risk and no chance of immediate success? So Ryan could get the party on record supporting his plan, depriving quiet dissidents of any future excuse to defect should the real vote come in 2013.
Though the broad contours of the Ryan plan amount to a nonnegotiable demand thrust upon Romney by the Republican Party, there are significant gaps within the plan that leave Romney room to maneuver and that, we can imagine, he will use to his advantage. Because, starting January 20, Romney will be faced with the same crushing pressure Obama has endured for the past four years: an anemic economic recovery. If he intends to win reelection, Romney will have to come up with some plan to improve our job numbers.
Here’s where his administration could get surprising. Romney has built his campaign on the promise of alleviating the immediate pain of the recession, yet his program to reduce unemployment is vague bordering on nonexistent. (“If we win on November 6th, there will be a great deal of optimism about the future of this country,” he told donors during his infamous, secretly recorded Palm Springs diatribe. “We’ll see capital come back and we’ll see—without actually doing anything—we’ll actually get a boost in the economy.”) Republicans fervently believe the Ryan plan would restore prosperity over the long run, but even they recognize it has essentially no relation to the economic maladies of the moment. The Obama administration’s approach to the economy has been to follow the tenets of Keynesian economics, which prioritizes stimulating consumer demand (through government spending and/or tax reductions), by deliberately jacking up short-term deficits. During the 2001 recession, Republicans agreed with this theory—advocating quick tax cuts—and they appeared to be heading in the same direction in early 2008. But since Obama’s election, they have turned wholesale against Keynesian economics, instead suggesting that an immediate reduction in deficits could boost the recovery. Recent history, especially in Europe, has not been kind to these austerity enthusiasts.
The thing to keep in mind, though, is that Romney and his advisers have never bought into their party’s anti-Keynesian mania. The two main economists advising him, Columbia’s Glenn Hubbard and Harvard’s N. Gregory Mankiw, argued for short-term deficit spending at the outset of the crisis. Mankiw actually wrote a New York Times op-ed shortly after Obama’s election that began, “If you were going to turn to only one economist to understand the problems facing the economy, there is little doubt that the economist would be John Maynard Keynes.”
Romney has held his cards close. Generally, he has advocated smaller deficits without specifying whether he means long-term deficit reduction or immediate deficit reduction. (And horse-race-obsessed interviewers have not bothered to pin him down.) On occasion, he has slipped into what sounds a lot like the Keynesianism of his top economists. Last month, Romney told 60 Minutes he would phase in his spending cuts “in a very careful way, such that we don’t have a huge drop-off with an austerity program that puts people out of work in government.”
Even more tellingly, these sorts of comments have provoked almost no reaction from the right. Every time Romney lets slip some word of praise for his handiwork in designing universal health care in Massachusetts, the right scorches him with cries of treason. That the ideological commissars of the GOP have permitted him to harbor full-scale heresy on the question of Keynesian economics suggests that the party’s new austerity doctrine has laid down shallow roots.
This extends all the way to the most vocal of the party’s self-described deficit hawks. As some of us have noticed, Ryan has billed his budget as a deficit-reduction proposal, but it contains little explicit in the way of deficit reduction. Indeed, the parts of the plan with specified policy changes contain far more in the way of deficit increases (tax cuts, defense-spending hikes) than in deficit reduction (generalized intentions to eliminate tax deductions and reduce domestic spending).
The skin-deep commitment to immediate austerity and the vagueness of the Ryan plan both point in the same direction. Conservatives will hold Romney to his commitment to the Ryan plan’s long-term dismantling of government, but allow him to put off the vast bulk of deficit reduction. Republicans have established a clear record of screaming bloody murder over deficits during Democratic presidencies and then losing all interest in the topic when they occupy the Oval Office. And Romney would have any number of tools available to him to delay the hard decisions: magic asterisks, rosy scenarios, tax-reform commissions, bipartisan panels, etc.
Even better, from Romney’s perspective: A plan that increases deficits in the short run allows him to offer a political olive branch to Democrats without breaking faith with his own base. They’ve been calling for more stimulus since 2009, haven’t they? Well, here’s their chance! This was the approach Republicans used during George W. Bush’s first term to Shanghai Democrats into voting for their tax cuts. They would attach the short-term stimulative tax cuts Democrats demand (focused more on the middle class) to long-term tax cuts for the rich, and dare Democrats to mock their own constituents’ economic pain by opposing it. Romney may not win over large numbers of Democrats this way. But the forces that will bear down on Romney—Republican demands for the Ryan plan, the beliefs of his own economic advisers, his political need to bring down unemployment quickly, and the benefits of at least the appearance of bipartisanship—all converge on the same strategy: quickly pass the Ryan plan, couple it with middle-class tax breaks, and put off many of the nastiest cuts to middle-class services for the future.
Which leads us to one of the paradoxes of this election: Democrats have implemented Keynesian stimulus and called for more (Obama’s proposed American Jobs Act, which House Republicans have blocked), while Republicans have denounced it in apocalyptic terms. But a Republican win offers by far the more likely prospects for immediate Keynesian stimulus, partly because Democrats in Congress have shown no taste for the kind of economic sabotage that the Republican caucus has engaged in. The strange alchemy of political self-interest dictates that the best prospect for boosting the recovery, through elevated short-term deficits, requires handing the reins of government over to the party that has blocked exactly this possibility.
Obama tends to leave the contours of his second term pleasantly vague, which has fueled the general impression that he is tapped out and has no particular achievable goals in mind. He often posits that, should he win reelection, Republicans will abandon their strategy of total opposition, citing Senate Minority Leader Mitch McConnell’s unusually frank confession back in 2010 that his top priority was to block Obama’s reelection. “Now, after the election, either he will have succeeded in that goal or he will have failed at that goal,” Obama has said. “And I’m hoping that after the smoke clears and the election season’s over that that spirit of cooperation comes more to the fore.”
There’s little reason to share this profession of faith. Republican obstructionism is not only a strategy to deny the president a second term. Some Republicans genuinely fear Obama, and others fear a right-wing primary challenge if they compromise with him. What’s more, the political calculation that undergirds his opponents’ strategy will not disappear: His popularity is the single biggest factor determining Republican prospects for enlarging their control of Congress and winning the White House. Cutting bipartisan deals increases Obama’s standing and thus reduces theirs.
You might surmise from all this that Obama is simply living in a dream world. That is the conclusion drawn by several of the smartest liberal political analysts I know. I have a different conclusion: Obama does have a plan to break the legislative impasse and settle the long-term struggle over the scope of government. It does not rest on the GOP’s coming to its senses and thinking of the national good. The plan is the very opposite of naïve. And he can put it into effect even more quickly than Romney could enact his own plan.
Here is how it will happen. On the morning of November 7, a reelected President Obama will do … nothing. For the next 53 days, nothing. And then, on January 1, 2013, we will all awake to a different, substantially more liberal country. The Bush tax cuts will have disappeared, restoring Clinton-era tax rates and flooding government coffers with revenue to fund its current operations for years to come. The military will be facing dire budget cuts that shake the military-industrial complex to its core. It will be a real-world approximation of the old liberal bumper-sticker fantasy in which schools have all the money they require and the Pentagon needs to hold a bake sale.
All this can come to pass because, while Obama has spent the last two years surrendering short-term policy concessions, he has been quietly hoarding a fortune in the equivalent of a political trust fund that comes due on the first of the year. At that point, he will reside in a political world he finds at most mildly uncomfortable and the Republicans consider a hellish dystopia. Then he’ll be ready to make a deal.
Leading up to the New Year, there will be a concerted effort to preempt this policy shift, by bringing the two parties together to consummate a version of the endlessly touted (but little-understood) Bowles-Simpson agreement that GOP House members rejected. This is already under way, and is being described in the press as a noble bipartisan effort to avoid something terrible. But it is more accurately understood to be a conservative attempt to avoid a massive shift in leverage in Obama’s favor. Some Democrats get this. (Charles Schumer is one of the few willing to take a hard-ass line against Bowles-Simpson). I also believe that, despite his silence on the matter, Obama gets it, too.
One reason I believe Obama will stand firm and refuse to make a deal in 2012 is that I know what Obama-land looks like when it’s under the spell of bipartisan delusions. After Republicans swept the 2010 elections, they decided to take the regular occasion of raising the debt ceiling, a necessary step to avoid fiscal calamity that had evolved into an opportunity for the opposition party to posture symbolically against the president, and hold it hostage. I spoke with high-level administration policy-makers several times off the record, and they consistently expressed a belief that Republicans would compromise with them on a plan to reduce the budget deficit by agreeing to some form of higher revenue in return for spending cuts.
I thought these officials were insane. Sometimes I suggested as much. In response they simply expressed spooky, disconcerting confidence that it would happen because, well, it had to happen. Obama and his chief advisers genuinely seemed not to grasp that the Republican Party had been organized for two decades as a fundamentalist anti-tax party—in particular, against taxes paid disproportionately by the affluent—which no appeal to reason, the national interest, or the sake of fiscal conservatism could possibly dislodge.
The administration pursued this credulous path for the first half of 2011, falling back to the limits of what the president could accept in good conscience, and then retreating further still. In private negotiations with House Speaker John Boehner, Obama offered a long-term debt-reduction deal that would have increased tax revenue by only $800 billion—just one fifth of the total deficit reduction needed. It was a remarkably, even stupidly generous offer. Two other bipartisan debt agreements, one by the debt commission chaired by Erskine Bowles and Alan Simpson, the other negotiated by two parties in the Senate, had settled on the neighborhood of $2 trillion in higher revenue. To Obama’s astonishment, Boehner turned down his deal anyway.
It was the nadir of Obama’s term. The spectacle of the United States government approaching the brink of debt default for no reason other than destructive partisanship shook business confidence and provoked S&P to downgrade American debt. Obama’s approval ratings sagged into the thirties, the lowest point of his presidency. His attempts to placate the right had disgusted liberals without any corresponding benefit in the center or on the right. For the first time in his presidency, it appeared plausible that Obama might fulfill Republican predictions that he would be another Jimmy Carter. Charles Krauthammer suggested he might suffer not only defeat but a “landslide.”
The effect of this episode seems somewhat akin to the punch to the jaw Michael Corleone took from the corrupt police officer Captain McCluskey. Obama stopped constructing his strategy around the premise that he could win Republican support—which is to say, he stopped trying to pass laws through Congress. In September, he unveiled his classically Keynesian jobs plan of public investment and middle-class tax cuts, knowing full well Republicans would reject it. In December, he delivered an address in Osawatomie, Kansas, laying out his vision of government, which was largely an argument against the Republican anti-tax jihad. Low taxes for the rich, he argued, had made the country less equal without making it more prosperous and starved the public sector of investments needed to help spread economic opportunity.
In one form or another, Obama has repeated the themes from his Osawatomie speech throughout the campaign. The campaign itself is essentially an extension of his failed negotiations with the House GOP. Obama wanted to strike a deal with Republicans but, having failed, he took his case to the public, calculating that the uncompromising stance Republicans had clung to behind closed doors would prove politically fatal to them if defended in the open.
Obama may have abandoned his attempts at progress through compromise, but he is pursuing progress through other means. Administration officials no longer say that they can cajole Republicans into agreeing to raise tax revenue through negotiation. Instead, they understand something important, something that has not quite sunk in with wary liberals, obstinate conservatives, or split-the-difference deficit scolds: They no longer have to.
The odd thing about the debt-ceiling debacle is that the deal Obama tried to cut with Republicans may have been absurdly generous, but the deal he actually got was pretty favorable. It required the establishment of a bipartisan commission that had to agree to $1.5 trillion worth of reductions—which, of course, it could not, for the same reason every other bipartisan deficit negotiation failed—or else automatic cuts would take place in 2013. Because Republicans refused to allow higher revenue to make up any part of those cuts, and insisted all the automatic deficit reduction consist of lower spending, Obama made his own demand: that he have a greater say in what kind of spending would suffer cuts. Social Security and Medicare benefits were exempted, though cuts to Medicare providers were not. Programs that benefit the poor were likewise spared, but defense absorbed a huge proportion of the automatic cuts.
The idea was to turn the Republican coalition against itself. As the clock ticked toward January, doctors, hospitals, and—most especially—defense contractors would be confronted with terrifyingly large reductions in their income stream. Voiding those cuts would require convincing Obama to sign a law undoing them, which he would not do unless the replacement plan met his definition of fairness, which meant including higher tax revenue from the rich. This has had precisely its intended effect. Executives and lobbyists have begun to beseech Republicans to accept a budget deal that includes higher revenue along with lower spending. Republican defense hawks like John McCain and Lindsey Graham have signed a letter calling for a “balanced bipartisan deficit reduction package,” which is Beltway code for a deal mixing taxes and spending.
What really lured Republicans into a trap was the timing of the arrangement. The beginning of 2013, when the automatic spending cuts take effect, coincides with the expiration of every penny of the Bush tax cuts. And so, by postponing the fiscal reckoning, Republicans inadvertently scheduled it for the very moment when Obama (should he win reelection) will hold his maximum leverage. Last summer, Obama was pleading with Boehner to give him $800 billion in additional revenue. Come January, he’ll have $5 trillion in higher revenue without doing anything. Since Obama’s own budget proposes to raise only $1.5 trillion in new revenue and trim entitlement spending, he could then offer Republicans a deal that cuts taxes (by, say, a couple trillion dollars), increases military spending, and reduces entitlement spending. In other words, he could offer a right-wing bill—and the end result would be a mix of policies to the left of his own budget, and to the left of the Simpson-Bowles proposal.
If Romney wins the election, Obama’s leverage disappears. As part of their big-bang vote on the Ryan plan, Republicans could just cancel the tax hikes and spending cuts they don’t like without finding other ways to fill the hole in the budget, and live with the pain of being called deficit hypocrites by Rachel Maddow and Paul Krugman. But if Obama wins, starting on January 1, everything that has held true in Washington for the past two years flips upside down. Even tax reform, which the two parties have endlessly discussed but failed to agree on, will suddenly become very easy, because instead of using reform to make people pay more, any new reform will tax people less. The term that keeps popping up among Obamans is break—as in, “we have to break the Republicans on taxes.” Assuming Obama wins reelection, the moment the apple falls in Times Square, the Republican anti-tax crusade will be broken, and with it the pathology that has launched the deficit wars.
This is not the story you have heard about the budget. You have probably heard a terrifying tale of dysfunction and impending doom, with the catchphrase “the fiscal cliff” used by budget wonks to describe all the automatic changes scheduled for January 1. It’s a story of disaster that could arrive by accident and must be prevented at all costs. Every aspect of this narrative is inaccurate.
The term “fiscal cliff” has leached into the broader political lexicon, though few people understand what it means, and many of them invoke it to mean its precise opposite. Among Republicans, especially, “fiscal cliff” has come to signify their Obama-era fears of a Greece-style debt crisis. Pete Peterson, an investor and longtime fiscal hawk, has devoted more than a half-billion dollars to lobby for a bipartisan debt-reduction agreement, funding a vast network of centrist anti-deficit activists, like the Concord Coalition, the Committee for a Responsible Federal Budget, and an organization called “the Campaign to Fix the Debt,” all of which have pounded a national drumbeat warning against the perils of the fiscal cliff. “Rhetoric won’t fix the debt, action will,” warns a statement by Fix the Debt. A “solution to the nation’s fiscal crisis,” scolded the Washington Post editorial page, which closely echoes the views of the Peterson network, “can be implemented only if Republicans and Democrats hold hands and jump together.”
This is all utterly wrong. Bipartisan agreement is not necessary to fix the debt. Nothing is necessary to fix the debt. It is as if the network of activists, wonks, business leaders, and Beltway elder statesmen who have devoted themselves to building cross-party support for a deficit deal have grown more attached to the means of bipartisanship than to the ends for which it was intended. The budget deficit is a legislatively solved problem. It is, indeed, an oversolved problem. In the absence of any agreement between the president and Congress, the deficit will shrink to less than one percent of the economy by 2018, and remain below that level through 2022. The budget deficit declines so sharply and so drastically, and in ways that neither party is entirely comfortable with, that the task for Washington is to pull back on deficit reduction.
It’s true that should all this come to pass and Congress does nothing at all, allowing all automatic deficit reductions to stay permanently, then our economy would be hit by a powerful shock—a massive anti-stimulus. This is the outcome that terrifies moderate liberals like Howard Fineman, who warns that the nation is about to “go over the fiscal cliff with no hang glider.”
But here is a case where a bad metaphor has caused everybody to think about the matter in exactly the wrong way. When you walk off a cliff, the first step is your last. There is no such thing as falling halfway down a cliff. But the “fiscal cliff” is not a cliff at all. The economic damage is cumulative. It is the opposite of the debt ceiling, when the doomsday clock ticked down to a moment of sudden calamity. A full year of inaction would do a lot of damage, but a week, a month, or even a couple of months would not. The president would have enough control over the mechanics of the budget to delay the effects of higher taxes and spending cuts in order to cushion the blow to the economy. Even if the tax hikes and spending cuts go into effect, any deal that gets signed later could be retroactive. Meanwhile, the Federal Reserve could also take emergency action to keep the recovery afloat.
It’s not certain that Obama will have the fortitude to make it to January without surrendering to demands to cut a deal. He will have to endure a concerted persuasion campaign by the business lobby and the cries of the fiscal scolds, which will grow to a deafening volume by December. But if he does, Obama will have a stronger hand than he has had at any time before. On the eve of his inauguration, he will find himself holding the political high ground in the midst of a perceived economic crisis. He will demand that Republicans retreat on their refusal to increase taxes on the rich, and join him at the table.
The fight will likely come down, as it has in the past, to the extension of the Bush tax cuts. Everyone, even Democrats, will be clamoring for middle-class tax relief, and the Republicans may employ hostage tactics again, refusing to cut those taxes unless Obama agrees to extend all the Bush tax cuts, right on up to Bill Gates’s. This is how Republicans played it when the cuts were scheduled to expire at the end of 2010, and Democrats buckled almost immediately, agreeing to a two-year extension for everyone.
At least some conservative Republicans plan to run the same play again. They’re likely to find it no longer workable. Obama’s campaign message, with its sharp differentiation on taxes, has unified congressional Democrats behind an insistence that the Bush tax cuts on income over $250,000 must end. By January, the economy will have crawled further out of its hole than it had in 2010, and Obama’s reelection campaign will be over, rendering the threat of a middle-class tax hike much less dire. In fact, though Obama officials are very careful not to say so, they may not view the threat of ending the Bush tax cuts on income below $250,000 a year as a threat at all. If no deal is made, remember, Democrats win by default: Their most cherished domestic priorities are protected, and the Republicans’ are assailed.
The final piece of drama will be the return of the debt ceiling. The extension Obama won last summer will expire sometime around February or March. If Obama and the Republicans still have not resolved their struggle two months into the year, amid an atmosphere of panic, then the looming threat that Republicans might refuse to raise the debt ceiling could well offer them a useful hostage once again.
But the GOP’s ability to threaten financial apocalypse in order to extract concessions is unlikely to work nearly as well this time. In 2011, Republicans were demanding spending cuts, which put them in good standing with the business elite and anti-deficit center. In 2013, should it come, they will be demanding tax cuts and increases in defense spending, a far more complicated message. What’s more, there are strong legal arguments that the president can ignore Congress and essentially moot the debt ceiling on his own. Obama ignored these tools in 2011 and submitted to a shakedown because he believed he could cut a deal. Members of the administration aren’t brandishing this weapon, but, somewhat like the Israeli nuclear program, they are happy to have its existence known, if not acknowledged.
It’s important to be clear about what a defiant Obama II would offer, because it is both more and less than liberals are expecting. They may hope that Obama passes new job-creation measures in his second term. But he appears to have decided that the price of more short-term stimulus—more tax cuts for the rich, which Obama extended in return for stimulus in his December 2010 deal—is no longer tolerable. For better or worse, the president hopes the recovery is strong enough to stand on its own two feet. Where he can actually win without compromise, however, is in some ways more significant.
The economic crisis and Obama’s presidency pried open the economic gulf between the two parties, which had been slowly widening since Ronald Reagan, into an unbridgeable chasm. Mitt Romney’s secretly recorded remarks attacked the Democratic view of government responsibility—he practically spit out the words “they are entitled to health care, to food, to housing, to you name it”—with a visceral passion he cannot feign in public. Obama’s abhorrence of the moral premises of the Republican budget is equally genuine. Romney and Ryan find Obama’s plans to tax the rich to create an entitlement to basic medical care morally offensive, as Obama does of their plans that would sacrifice college educations for working-class kids and meals for poor families to clear room for more Sub-Zero refrigerators and private jets.
The war has been waged with escalating bitterness for more than two decades. Bill Clinton set out to restore the possibility of effective and activist government by bringing the deficit down through a mix of spending restraint and a tax hike on the richest Americans. George W. Bush destroyed the Clinton project, and left behind a government bleeding red ink and starved of revenue. Obama completed the welfare state by finally establishing access to health insurance as a basic right of citizenship.
In essence, the main domestic work of the past three presidents—Clinton, Bush, and Obama—is all on the ballot this November. Whichever party wins will have within its grasp the power to break the back of the other’s political-economic macro-strategy. Obama and Romney may like to say they can work their will through agreement and reconciliation with the other party. But the tools that will be at their disposal are too blunt even to acknowledge.