It is a source of tremendous amusement to me that one day of every week contains a spate of news stories suggesting movement toward a tax and budget deal, only to be followed the next week by stories declaring that imminent disaster lies ahead and an apocalyptic cliff dive is just around the corner. It’s hard to figure out whom to feel more sorry for: the eternal optimists who think that contrary to practically anything that has ever happened in Washington, something this big would ever be quick and easy to resolve; or the profound pessimists who cannot imagine a deal under any circumstance; or, for that matter, the reporters who alternately buy into one scenario or the other.
There are profound philosophical differences between conservatives and liberals—and, yes, Republicans and Democrats—on the best course of action. There are honorable people on both sides with legitimate differences in their points of view. There are also serious political consequences to be weighed—considerations that alone would cause many (if not most) lawmakers to hesitate before embracing a compromise. Anyone who thought that budget sequestration and expiration of the Bush tax cuts would be resolved by New Year’s Eve should have a court-appointed guardian look after their affairs and make all decisions for them.
At the same time, anyone who believes that no agreement is likely or possible in the next six or eight months—that there will be no patching over of sequestration until a larger deal is done, that Congress and the president are locked into a barrel and heading over a fiscal Niagara Falls—ought to put on an Eeyore costume and fret over the next meteor shower headed toward Earth, which they no doubt will earnestly believe will wipe out mankind. They are just that kind of person.
This whole process is going to be long, difficult, frustrating, and painful. Moods will rise and fall, and my guess is that the financial markets may well have some pretty exciting days, in the same ways that roller coasters are alternately exhilarating and terrifying.
My hunch is that some kind of stopgap deal will be done to either head off sequestration or control it so that the across-the-board federal spending cuts to defense and domestic programs (except Social Security, Medicare, Medicaid, and a few others) will not automatically kick in. That will enable reaching a bigger agreement early next year. It would not surprise me to see the full array of Bush tax cuts expire on Dec. 31, only increasing the pressure on Republicans to cut some kind of a deal that they would have previously considered unacceptable. We will likely see a series of budget deals, each hard fought, gradually taking in more elements until a “grand bargain” is finally reached. The agreement will cover major discretionary spending and entitlement cuts and significant increases in revenue, though the proportion of tax-expenditure reductions versus tax-rate increases is very much up in the air. All of these deals, though, will involve a continuous series of jaw-dropping and stomach-churning roller-coaster rides, and people should reconcile themselves now to the likelihood of these events.
While, technically speaking, November’s election produced no changes in leadership—the White House and Senate are still in Democratic hands, and the House is still under GOP control—the zeitgeist seems very different. The testosterone levels on the Republican side are dramatically lower than two years or, for that matter, two months ago. Although it is not unfair for Republicans to see last week’s opening offer from Treasury Secretary Timothy Geithner as little short of an insult, one gets the sense that Democrats know they will end up with a deal that looks nothing like that.
The focus is now on how Speaker John Boehner and other Republican leaders will sell significant revenue increases to some of the more exotic, very conservative members of their House and Senate conferences, and how President Obama and Democratic congressional leaders will sell equally unpalatable entitlement changes to their equally exotic liberal colleagues. It is totally unrealistic for Democrats to expect Republicans to jump off their tax cliff without Democrats having to jump off their entitlement cliff. The “what’s mine is mine, and what’s yours is negotiable” attitude isn’t going to work. The adults on each side seem to instinctively know that. But unfortunately there are more than just adults in the room on both sides and we have certainly not heard the last of the partisan posturing and sabre rattling.
The real question is, how much stress will be put on our exceedingly fragile economy? How much will people’s 401(k) and other retirement savings take a beating? And how horrific will this whole process be before there is a final agreement? Hiring and investment decisions by business leaders and spending by consumers will be held hostage, swung back and forth by the daily advances and setbacks.