Hey, guys. I'm back. And 2 days before the New Year!
If Congress can't agree to a deal before the New Year arrives, then a few things happen all at once. The Bush tax rates get repealed, the sequestration budget cuts agreed to in 2011 kick in, and the new taxes on investment income from the PPACA (aka Obamacare) go into effect, and the payroll tax cut unwinds. This is known as the "fiscal cliff", a term popularized by Fed chief Bernanke in his frequent testimonies before Congress on the matter.
As President Obama likes to say, elections have consequences and his side won this November. He's seeking concessions on revenue and spending that the House Republicans are unwilling to give. And although it's widely expected that some form of "patch" will get hurried through to the President's desk before midnight on December 31st, it only forestalls the greater ideological clash: determining the size and scope of the government.
After the Republican Revolution gave Republicans control of the House and Senate for the first time 4 decades, President Clinton declared that "the era of Big Government is over" and then beat the Republicans at their own game of budget balancing and welfare reform. But now it seems like there are countervailing winds and Big Government seems, once again, to be back in vogue in the media, Capitol Hill, and the general public sentiment.
Given all of this, it should be revealing that the Democrats don't have any faith in their own economic ideology. The intellectual heart of the Democratic Party, the opinion pages of the New York Times, has frequently argued that the government needs to spend more and more money. And it needs to deficit spend more than ever to make up for the weak demand of the private sector.
If that's the case, then most Democrats should want to go over the fiscal cliff. Because it would raise more revenue for the government. And that means they have more room to deficit spend. Many Democrats are fond of trumpeting (that last one really isn't a Democratic source, but hey...San Francisco) that each dollar spent by the Federal government has a GDP multiplier of somewhere between 1.5-2 dollars.
Keynesian economics state that when demand is low in the private sector, it's up to the government sector to make up for it by spending a lot of money. If the government has more money, it can increase its deficit spending by the same proportion of revenue increases. The only political risks involved to the Democratic Party are electoral losses in the short term if government spending is unable ramp up quickly enough to offset the loss in private sector wealth.
In the long term, it's already been demonstrated that Federal spending never decreases. So Democrats will eventually get what they want, which perhaps explains the White House's intransigent negotiating position. Personally, I think both parties should go over the cliff just to see what happens, both in the short and long term. I wouldn't mind if the Republican Party goes into the political wilderness for a decade and we essentially had 1 party rule according to Democratic ideology.
When you half-ass government policy, it produces mixed results and whoever has the better spin operation lives to muddle through with a slight upper hand for the next election cycle. That is what's killing American dynamism. It's better to take your licks now and thrive later than to just muddle through.