Obama’s fiscal cliff game plan: Let’s make a deal

By Merrill Goozner

Avictorious President Obama will return to the White House for his second term with a strengthened hand to pursue his centrist agenda with a divided Congress.

While the Republican House majority may continue to oppose Obama’s initiatives, the legislative calendar now works in the president’s favor. The first test will come over the next several weeks as Congress wrestles with the fiscal cliff, the already legislated set of tax increases and spending cuts that could yank a half trillion dollars out of next year’s economy and throw the nation back into recession.

If the House, where Republicans lost 7 seats from their solidly conservative majority, refuses to compromise on raising taxes on upper-income households, the president can simply allow the tax cuts enacted in 2001 and 2003 to expire. The nation will then return to the tax rates in effect when Bill Clinton was president, a time when the nation enjoyed its greatest job creation spree of the past three decades while generating budget surpluses.

The still fragile economy is in a very different place today, of course. Most economists believe tax hikes of that magnitude will trigger renewed recession, as it largely eliminates the ten-year deficit that the president listed as his number one priority during his early morning victory speech to the huge throng in Chicago’s McCormick Place.

LET’S PLAY KICK THE CAN
But the president has the power to delay implementation of the new tax withholding tables for months as Congress and the White House work on a tax reform package that cuts everyone’s tax rates. In essence, allowing the Bush-era tax cuts to expire creates room for the tax reform program modeled on the proposal of the defeated Republican candidate Mitt Romney, only from a higher tax base.

The same dynamic will play out on the spending side. Only the progressive left and libertarian right back the magnitude of the Pentagon budget cuts contained in sequestration – the across-the-board spending reductions enacted as part of the August 2011 debt ceiling deal. The president can seize the high ground by offering to restore most of the new military cuts in exchange for more modest spending cuts in domestic programs. Adjustments could be made in the size of the tax cuts or the pace of deficit reduction to accommodate that strategy.

Washington’s permanent government – the small army of lobbyists that populate K Street – will take care of the rest. Physicians and the American Medical Association will take up arms against the Medicare pay cuts and every business lobbying group in Washington will clamor for restoring their special tax breaks – the so-called extenders like credits for research and development. Or, the extenders will become bargaining chips in a tax reform deal that lowers overall corporate rates – a major objective for corporate lobbyists.

With nearly $4 trillion in new revenue over the next ten years to play with, Congress shouldn’t have trouble coming up with the money needed to reform the corporate code and make the “doc fix.” The same holds true for preventing the alternative minimum tax from hitting tens of millions of middle-class Americans. There appears to be a broad consensus for eliminating the payroll tax cut that kept the recovery on track over the past two years, which further reduces the amount of deficit reduction needed from other measures.

Beyond dealing with the fiscal cliff, Obama will not need much from Congress in the first half of his second term. If Republicans want to fight him on immigration reform, his third-ranked priority in his victory night speech, they risk further alienating the fastest growing minority in American politics, which gave Obama surprising victories in swing states like Colorado, Virginia and Florida.

Needless to say, the Republicans failed miserably at their primary agenda. Besides failing to unseat the president, they did not win the Senate, which means they will not be able to roll back the Obama’s signature achievements from his first two years in office.

OBAMACARE SURVIVES
Health care reform remains on track for implementation. The president could, as part of budget and tax reform, offer to scale back the insurance subsidies and the scope of Medicaid expansion. While that will anger the left, who saw the reform bill’s failure to solve the entire problem of the uninsured as its greatest failing, it would be in keeping with the spirit of compromise contained in the original law, which was, after all, modeled on legislation crafted in Massachusetts by Gov. Mitt Romney.

The financial sector reforms contained in Dodd-Frank are also now safe from repeal. With newly elected Massachusetts Senator Elizabeth Warren up the seat once held by Sen. Ted Kennedy, not only will her prized Consumer Financial Protection Bureau continue to operate, but most of the new regulations designed to avoid a repeat of the 2008-09 financial sector meltdown will be able to move forward with minor adjustments to accommodate the legitimate concerns of the financial sector.

For all their complaints, it was never true that Rep. Barney Frank and Sen. Chris Dodd, now both gone from Congress, or Treasury Secretary Timothy Geithner for that matter, were populist crusaders against the banks. The wiser heads on Wall Street and in the banking community recognize that, and Obama will have the chance with his next pick for Treasury Secretary to give them further assurances.

The president mentioned climate change in his victory speech. Conservative Republicans and the fossil fuel industries, which provided a substantial share of the outside money that poured into the anti-Obama SuperPACs, will no doubt dig in their heels against any bold approaches – a carbon tax, for instance.

But with infrastructure needs mounting in the wake of Hurricane Sandy, the national mood could shift. As New Jersey Gov. Chris Christie, a likely contender for the 2016 Republican nomination, showed in the waning days of the campaign, major climate-related events have a tendency to upset political apple carts.

ONE MORE BULLET IN THE GOP ARSENAL
The Republicans in the House still have one major card to play, though. Sometimes early next year, the debt ceiling will need to be increased. Boehner, flanked on his right by Rep. Eric Cantor, R-Va., and Rep. Paul Ryan, R-Wis., who returns to the House with increased power gained from his national exposure, could opt for a repeat of the summer 2011 crisis.

Or, alternatively, he and the remaining centrist elements of the Republican Party can look at the range of moderate alternatives the president will put on the table. They could decide to do what’s right for nation, which coincidentally would enhance their prospects of rebuilding the Republican Party so that is more in tune with the U.S. electorate.

As Tuesday night’s results showed, that multicultural electorate, at least in presidential election years in all sections of the country except the Deep South and sparsely populated plains, is becoming more center-left, not center-right.

Merrill Goozner is a contributor at The Fiscal Times. Subscribe to The Fiscal Times' FREE newsletter.

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