By Terry Connelly, dean emeritus of the Ageno School of Business at Golden Gate University
Apparently, it didn’t stand for “Christmas” either; maybe we should just leave it as “C” for “Cliff.” Whether or not we “go over” the Cliff on January 1, 2013 is now anybody’s guess, but probably in the long run it doesn’t matter as much as whether we bungee-jump back to fiscal sanity of sorts some time before the State of the Union address by President Obama in late January.
Indeed, the “Bungee Bounce” is most probably the new “Plan B.”
Plan B Falls Flat
It was hard to know what the old Plan B really stood for. Maybe, given his surname, the Speaker just liked the sound of the letter “B.”
Billed as a plan to preserve the Bush Tax Cuts for everyone but those making a million dollars a year, the Plan in fact reduced those folks taxes, too, by keeping the marginal rate on their earnings below a million dollars at the Bush levels. Boehner defended the Plan, against the objections of Tea Party and Club for Growth purists, as not really being a tax increase on millionaires because their taxes were already scheduled to go up under the Fiscal Cliff scenario.
But he seemed to miss the irony that the same could be said for President Obama’s plan, which Boehner of course opposed on principle. And the original Plan B did nothing to avert the sequestration of military spending or to mandate the more aggressive spending cuts they said Obama’s plan lacked.
It's in the Senate's Hands Now
The demise of Plan B for lack of support in the Speaker’s own caucus, however, did have a major consequence: it left President Obama without a partner for any “Grand Bargain”; it cemented the band of House Republicans as unwilling to raise taxes even on millionaires (at least without deep cuts in the social safety net for everybody else); and it brought the Senate back into play in how this all gets resolved.
The last point may prove significant for two reasons: (1) under the Constitution tax-related legislation is supposed to originate in the House, but the House has abdicated for the moment; and (2) that in turn raises the specter of Tea Party Republicans in the new House of Representatives who feel backed into a corner resorting again to the nuclear weapon of debt ceiling defaults to extort a tax cut for everyone, not just the "middle class” once the Fiscal Cliff hits. Although the President, with strong Big Business backing, says this time he won’t “play that game,” he may have to in the end if no deal is reached before New Year’s Eve to avert the Cliff tax increases on couples earning less than $250,000.
A Grand Bargain Is Still Possible
There is no point at this stage in hashing out the details of what the Fiscal Cliff is – even my middle school daughter (who rudely calls it the “physical cliff” to put it in the same disfavored category as her PE class) knows what the Cliff entails. The big point now is what it ISN’T – which is to say, it is not “immediate.” Lawmakers have a few weeks before the new “W-2” deductions reflect both the expiration of the Bush income tax cuts and the Obama payroll tax cuts for employees. And the Administration can possibly defer the sequestration of military spending sequestration using the President’s war powers, and Treasury can squeeze out a few more weeks until the death ceiling hits. But, as the saying goes, life’s only certainties are death and taxes, and this year-end, death remains certain and so does the expiration of the current Estate Tax cuts.
The outlines of a Grand Bargain remain fairly clear and essentially only a few hundred billion apart in outcomes favored by the two sides” – but the fact is there are really three sides – Republicans who want a reasonable deal from their point of view; Democrats who share the same goal with different numbers; and the Tea Party Republicans who live in an alternate universe of denial. The hope is that universe will finally be shattered by the effect of the Bush Tax Cuts really going up on January 1 so that they can be cajoled into voting for a tax CUT for everybody (even a little one for millionaires that Obama will give once the Bush Cuts are gone). But alternative realities die hard, and even a Grover Norquist blessing may not persuade the Tea Party to go along when Rush Limbaugh – who has succeeded thus far in urging them to let the Cliff happen so Obama owns it – tells them in January to just say "no" again.
Many observers believe that the current breakdown in negotiations is really all about another re-election—this time Speaker Boehner’s. But he really has no opposition in his Republican caucus, and they are not going to vote for Nancy Pelosi when the new House convenes on January 3. If the Fiscal Cliff crisis continues until then because not even a stop-gap deal is reached by New Years Day, it will remain whether the re-elected speaker is really John Boehner, or Rush Limbaugh.
Can Republicans Get Their House in Order?
Here, then, is the most important question in the whole Fiscal Cliff crisis right now. Will Boehner face down Limbaugh and allow a vote on a grand tax-cutting, spending-cutting, unemployment-benefits-extending, military-saving, ATM-fixing, entitlements-reform-promising, corporate-tax-reform outlining, estate-tax-compromising and debt-ceiling-deferring bargain that will pass the House with only a small minority of Republican votes? Will there be a Bungee Bounce off the Fiscal Cliff?
We should get a first clue to the answer by whether he will even do a small part of that before January 1? If the answer is still the Limbaugh “no,” he will hand the country a recession, and the President a once-in-a-generation opportunity to burn the Tea Party brand forever into the Republican hide in his State of the Union address. And then we will see if Rush Limbaugh (or Wayne LaPierre) is also the real President of the United States as well as Speaker of the House.
Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.