As the Republican Party splinters over the fiscal cliff negotiations, Democrats sound gleeful about the disintegration of a political foe that can't even reach agreement within its own ranks. But that may be bad news for the nation as a whole.
President Barack Obama and Congressional Democrats clearly have the upper hand in the cliff negotiations, now that House Speaker John Boehner has failed to rally his fellow Republicans behind a coherent plan to avert $600 billion worth of tax hikes and spending cuts due to hit in 2013. Republicans, of course, want to cut the deficit through spending cuts rather than tax hikes. Democrats want to raise taxes on the wealthy while fencing off social spending. It now seems more likely that a solution, if there is one, will favor Democratic priorities.
Most Americans will be happy to get any deal in place, so they don't start the year with a slew of tax hikes and a limping economy kneecapped by incompetent legislators. So a deal that raises taxes on the wealthy—which a majority of Americans support—with only marginal cuts to government spending, might seem good enough. But it won't be.
Most economists agree that it will take a combination of tax hikes on the majority of Americans, plus deep spending cuts, to get Washington's finances straightened out. The 2010 Bowles-Simpson report, considered by many to be a blueprint for balancing the federal budget, recommended $2 in spending cuts for every $1 in tax hikes. Other credible plans call for a ratio of spending cuts to tax hikes of as high as 4 to 1. So Republicans are onto something when they insist that excessive spending is the problem. Were the whole problem to be solved with tax hikes alone, it would cut most Americans' disposable income by far more than they're likely to stomach.
Republicans have some ideas on what to do about spending, too. Rep Paul Ryan's plan to reform Medicare isn't popular, because it would rework the whole program in a way that would cut benefits for most seniors. But Ryan's plan does acknowledge the coming Medicare funding crisis which will render the popular healthcare program financially unsustainable in about a decade if nothing is done. And it highlights the tough tradeoffs that will be necessary. That makes Ryan's plan a worthwhile starting point in a needed debate about how to make Medicare more affordable.
Yet the cliff negotiators are nowhere near that point, obviously. Some House Republicans have balked at the idea of even a minor tax increase, limited to the wealthy, which is a trivial objection given the depth of Washington's budget problem. Since virtually every budget expert agrees that taxes will need to rise for Washington to pay down the national debt, House Republicans are objecting to something that's inevitable, which merely delays a resolution of the problem. Meanwhile, the economy is growing at the slowest pace since the recession ended in 2009, as businesses and consumers await action in Washington.
The collapse of the Republican negotiating position now leaves the impression that Democrats will harden their stance, with Republicans relegated to an unproductive, obstructionist role. "Without a competent negotiating partner, Democrats may feel empowered to dig in and withdraw previously proposed spending cuts," the financial research site Briefing.com recently advised its clients. "The likelihood that the economy will go over the cliff may now be nearing 100 percent."
A short-term deal that doesn't include any meaningful spending cuts might cheer financial markets for a while, but it won't convince anybody that Washington has solved its debt problem. Any deal that perpetuates billion-dollar deficits will probably lead to another downgrade of the U.S. credit rating, which will formalize what investors already know: Washington can't seem to help itself. As long as Congress puts off the endgame, it's hard to foresee much of a pickup in business activity, a boost in hiring or an upswing in the stock market.
A deal that will make believers out of skeptical investors and CEOs will have to include meaningful spending cuts along with sizable tax hikes. Republicans need to be the ones pushing for spending cuts. And Democrats need them to play that role, to get to a deal that will make everybody better off, and one everybody can take credit for.
Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.