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Cliff's Fisca-La-La-La Follies

 December 18, 2012 11:23 PM

As we thought likely, Congress and the President appear to be inching toward a deal on the fiscal cliff. But remember, nothing is guaranteed, and a deal needn't happen by January 1. Thanks to the cliff's being an arbitrary, political deadline, any deal struck afterwards could retroactively apply to whatever equally arbitrary date they choose. So, to keep you informed of potential details of a potential deal, we provide you … more talk about talks.

At their third meeting in three days, President Obama and House Speaker John Boehner brought new compromises to the table. To start, President Obama retreated (at least, for now) from his call to raise taxes on married couples making more than $250,000 a year, raising the minimum for tax break expirations to $400,000 a year—seemingly conceding some to the opposition's stance against higher taxes on the wealthy. He also agreed to a GOP-designed plan to use a different inflation-indexing formula to overall slow growth in Social Security expenses—a simple accounting change, but a compromise. (And one reminiscent of past reforms enacted to aid the solvency of what many presume is a third rail.) In exchange for demurring on these points, President Obama seeks increasing infrastructure spending and extending some unemployment benefits. In addition, the President requested an increased debt ceiling. Clearly, the proposal represents a step back from President Obama's opening volley which sought $1.6 trillion in new revenue without spending cuts

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According to accountants on the White House's payroll, the compromise seeks around $1.2 trillion in revenue increases and about $1.22 trillion budget cuts over the course of the next decade. But it seems math can be very political! Accountants on the Republican's dime disagree with those final numbers, asserting the president's latest plan would result in about $1.3 trillion in revenue, but only around $930 billion in budget cuts—which Republicans seemingly see as a step in the right direction, but not all the way to an acceptable balance. We'll not get into debating whose accountants are tallying up the ol' government abacus correctly (which, frankly, is a very bizarre tool, often counting budget cuts as spending cuts when the two simply are not synonymous).

Plus, all these projections must be taken with many grains of salt, no matter who you believe. For example, tax revenue may possibly generate a certain amount, but future revenue will probably be more affected by tax avoidance by those experiencing hikes. Boehner says his ultimate goal for a budgetary deal is to achieve a complete equilibrium of budget cuts and tax hikes (e.g., $1 million in tax hikes for $1 million in spending cuts). Though, frankly, we think that's largely all the political dance—Republicans are likely simply trying to curry their base's favor following a less-than-stellar showing in November's elections. And to get there, we'll likely have a lot of politicized math. The figures determined by both sides left and right are pretty politically charged—and distract focus from budgetary probability to possibility.

In the end, what all of this fiscal cliff gamesmanship demonstrates is the cliff isn't so much a geological, geographical or even, for that matter, fiscal issue. It's a political one. And Obama and Boehner seem to understand that in their proposed compromises: Each is championing the ideals of his party, to maintain support from his partisan members in Congress. But with Obama's new proposal and Boehner's agreeing to some tax hikes, slowly and surely, the gridlock is seemingly breaking down for a bi-partisan deal. While it may mostly amount to talk at this point, the discussion seems pointed toward compromise. There's likely to be back and forth along the road ahead. But it seems we've taken a few steps closer to resolving the fiscal debate.

source: Market Minder
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