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In Fiscal Talks, It's Groundhog Day

The word started going out on Sunday night: President Obama and House Speaker John Boehner were this close to a deal. By Monday, journalists plugged into Democratic sources were writing sentences like this one, from yours truly: “An agreement on the ‘fiscal cliff’ may be near.” Well, here we are, 72 hours later, and an agreement doesn’t look very near. In fact, the prospects of an agreement before January 1, when tax increases and automatic spending cuts are set to take effect, seem awfully remote.

It’s a reminder that Washington can be unpredictable and that inside information isn’t always as valuable as it seems. But it’s also a reminder that the Republican Party hasn’t yet changed as much as some of us had been thinking. Large elements of the party aren’t ready to budge from extreme positions on spending, taxes, and the role of government—positions that the voters in the last election very clearly rejected.

The reason for hope, you may recall, had been a very real concession that key Republican leaders, including Boehner, had finally made in the last few weeks: Tax rates on the wealthiest Americans had to go up. These Republicans weren’t relinquishing their moral and practical objections to higher taxes; they were simply acknowledging a policy reality. The Bush tax cuts of 2001 and 2003, which had lowered income tax rates, were set to expire. Obama, having campaigned on a promise to restore the old rates for the wealthiest Americans, wasn’t going to sign a bill extending them. That concession had allowed serious negotiations to take place and, up through Monday, the two sides were in close contact, exchanging ideas and slowly, but surely, finding common ground. Obama's latest counter-offer became public, through leaks, on Monday.

But since then the fiscal cliff drama has played out like Groundhog Day, only instead of Bill Murray waking up to the harmonies of Sonny and Cher it’s President Obama waking up to the harangues of House Republicans. The last time this happened was in the summer in 2011, when the issue was whether, and under what circumstances, to increase the government’s borrowing ability so it could pay its bills. Liberals (like me) watched those negotiations anxiously, and nervously, as Obama offered substantial spending cuts and embraced, provisionally, a proposal to postpone the eligibility age for new retirees from Medicare from 65 to 67.

Obama contemplated the Medicare shift again this year. And while Obama ultimately rejected that suggestion, arguing that it would merely shift costs to seniors rather than reduce the cost of medicine, he has indicated that he would go along with a different proposal, demanded by Boehner, to recalculate inflation in a way that would reduce Social Security benefits. On the question of how much new revenue a deal would raise, Obama has reduced his demands—first it was $1.6 trillion, then it was $1.4, and then $1.2. Or, to put it in individual terms, his latest offer would raise taxes only on incomes above $400,000, not $250,000, as he’d vowed during the campaign.

Still, locking in more than a trillion dollars of revenue, all of it from higher taxes on the wealthy, would represent a significant accomplishment. So would extending unemployment insurance, investing in public works, renewing expansions of tax credits that help working families pay their bills and college students pay their tuitions. Obama’s counter-proposals included all of these, which helps explain why, notwithstanding the gnashing of liberal groups inside Congress and more than a few liberal lawmakers within it, party leaders like House Minority Nancy Pelosi stood by the president—and stood ready to provide the votes Boehner would need, inevitably, to get a bill through the House. On Capitol Hill, Democratic leaders assess Obama's leverage more or less as the White House does: Obama has the upper hand, but Republicans control the House and can filibuster in the Senate. In any deal, they'll have to walk away with some concessions from Obama.

But with those concessions in hand, or at least within grasp, Boehner did exactly what he did in 2011: He pulled back from negotiations. This time it was to introduce his Plan B, which would extend tax cuts on incomes up to $1 million. The wealthy would still get huge tax breaks; meanwhile, the government would get a lot less revenue than it would under Obama’s proposal, eventually forcing deeper cuts to programs like Medicare and Medicaid. And did I mention that Plan B doesn’t renew expansions of unemployment insurance or the tax credits for families and college students? Or did you guess that on your own?

Boehner’s motives, other than to keep his job as Speaker, are unclear. But if it was a negotiating ploy, as many suspect, it didn’t work, because Boehner quickly found himself, once again, making a proposal that his caucus was not willing to support. Conservative groups blasted the proposal—because, after all, it would still amount to a tax hike on the rich. Boehner is ready to recognize policy reality; the right wing, it seems, is not. And while Boehner responded by promising to add spending cuts, it's still not clear he has the votes to pass even this modified version of Plan B. Meanwhile, Senate Democrats have said they won’t vote for it and Obama has promised a veto if they do, making it all an exercise is staged futility.

To better grasp the skewed perspective Republicans still hold, consider an issue that’s emerged as the major point of contention—the notion of “balance.” By White House accounting, Obama’s most recent proposal has what amounts to to a one-to-one ratio of tax increases to spending cuts. Boehner says the White House accounting is wrong, that Obama's plan actually has far more tax increases than spending cuts. But Boehner is correct only if you discount interest savings that past Republican proposals, as well as the Bowles-Simpson chairman’s report, included. And Boehner is correct only if you ignore the last two years of fiscal policy making, during which Obama agreed to reduce the deficit exclusively by cutting spending. Put all the agreements together and, even if you throw in Obama’s latest proposal, the result would be a deficit reduction effort that reduced spending a lot more than it raised taxes—even though, in the presidential election, voters made it quite clear they didn’t want big cuts to entitlements and they did want higher taxes on the rich.

What happens now? Obama has sent a strong signal that he’s done with major concessions. The administration apparently imagined that its most recent offer was close to its final one—that the debate had come down to the numbers and that, in relative terms, the two sides were not that far apart. Obviously that was not the case. And whether Obama made the compromise offer because he is a lousy negotiator or because, given the economic and political alternatives, he felt compelled to pursue seriously a major deal—the two explanations are not mutually exclusive—it’s hard to imagine him budging much from his current position. Republicans, also prone to misjudging the contours of negotiations, may be skeptical. That would be a mistake—if only because, if Obama tries, the liberals who have supported him will go into open revolt. As they should. 

This drama seems likely to end in one of two ways. The Republicans come back to the table and agree to something that looks, more or less, like what Obama just offered. Or they end up negotiating a much smaller package, one that avoids the fiscal cliff but in a way that neither helps the economy, gives extra help for the vulnerable, nor makes substantial progress on the deficit—pushing those debates, along with an argument over the next increase in the debt ceiling, into next year.

The latter seems more likely than the former, although I'm no more certain of that than I am of whether it all comes together before January 1. The last few days taught me, again, that confidently predicting the outcome of negotiations is a bad idea, as much for the negotiators as for those of us watching them.