Gonna be an interesting year for American political economy

With the government not shutting down and all, Washington can now look forward to the next moment of Gotterdammerung, which is when the debt ceiling has to be raised.  By risking minor things like the full faith and credit of the United States, that kind of shutdown really would have serious foreign policy implications. 

That said, there is another possibility on the horizon — a grand bargain on long-term fiscal rectitude.  The good news is that there really is a bargaining core among the major players on entitlement reform, budget cuts, and tax reform.  The bad news is that one could say the same thing about an Israeli/Palestinian peace deal, and look how that’s playing out.  The follow-up good news is that I think there are political reasons to be more optimistic about the U.S. situation. 

Seasoned DC-watchers might immediately laugh at the prospect of the kind of bipartisan brand bargain on fiscal policy that hasn’t been seen since the days of Gramm-Rudman-Hollings and the 1986 tax reform bill.  That said, I think a bargain can be struck for the simple reason that there is at least a general consensus that the long-term fiscal picture for the United States is really daunting and in dire need of proactive policy measures.  This jibes with U.S. public opinion on the question.  The biggest question is what mix of spending cuts need to be taken — though I think the fiscal picture is sufficiently dire such that there’s gonna have to be serious steps taken in all possible spending spheres (Social Security, Medicare, Medicaid, discretionary domestic spending, Defense spending).  The combination of the Bowles-Simpson deficit commission, Paul Ryan’s proposed budget, and Obama’s scheduled Wednesday address means there will be multiple proffers on the table, so at least there are concrete measures to talk about. 

Furthermore, the tax code has gotten so complicated that there’s actual room for a tax deal that would simultaneously raise revenues but be palatable to Republicans.  For all the debate over raising or lowering tax rates, the key problem is that tax revenues as a percentage of GDP are at postwar historic lows.  If distortionary loopholes were eliminated, it would be possible to keep marginal tax rates where they are, or even lower them, while still raising revenues.  

Finally, the economic argument against fiscal tightening is that the economy is still in recession, except that’s not really true.  The economy has been growing at a steady clip for a yeat now.  The real concern is the job picture, but if last month’s numbers are suggestive of a more robust turnaround, then this would be exactly the moment to rein in spending and signal to financial markets that fiscal probity is coming. 

So I think a grand bargain is possible.  Now, the natural rejoinder to this is that the partisan split in Washington is too great for bipartisanship to work, the Tea Party will be unyielding, yadda, yadda, yadda.  This is a possibility.  It’s certainly true that the last time something on this scale was attempted, in 1993, it was a straight partisan vote.  If the Obama administration  and GOP members of Congress see this as a zero-sum game that ends with the 2012 election, then no bargain will be struck. 

There are two political reasons why I’m more optimistic this time around — although these reasons normally don’t count for much in political science.  First, the personalities of the key players suggest that they want to make a deal.  Barack Obama was the happiest I’d seen him in a long time when he announced on Friday night that a budget deal had been struck.  John Boehner, and his staff, set a nice precedent of being able to bargain with the Democrats while holding his caucus together, and earned some praise from Democrats for his dealmaking.   The personal inclinations of the pcvotal actors are biased towards cutting a deal.  [But what about the Tea Party?!–ed.  See this Dave Weigel post.]

Second, I think it’s beginning to occur to GOP legislatures that their crop of 2012 presidential camdidates really and truly stinks:

A presidential primary favorite is emerging among the ranks of congressional Republicans: none of the above.

The dissatisfaction with the likely GOP field — long whispered among party activists, operatives and elected officials — is growing more audible in the House and Senate.

Interviews on both sides of the Capitol have revealed widespread concern about the lackluster quality of the current crop of candidates and little consensus on who Republican senators and House members would like to see in the race. 

It’s early, and the fundamentals suggest that the eventual GOP nominee might make it a close race, but still — whoever gets the nomination is gonna have to run against a sitting president who’s still surprisingly popular given the state of the economy. 

If GOP legislative leaders calculate that they can’t win back the White House in 2012, their preference flips over to cutting a deal with the Obama administration.  Bipartisan deals help incumbents and hurt challengers, which means that in cutting a deal, the House Republicans would help Obama while helping themselves.  That’s not their first option, but in a political climate when Donald Trump can poll second in New Hampshire by embracing the birthers, it’s not the worst calculaion either. 

I look forward to commenters telling me how wrong I am about this.  But let me close this post by pointing out something that I think is obvious but might pass by some foreign policy pundits who get scared by economics that tend to focus more on matters of hard security.  From a foreign policy perspective, whether or not a Grand Bargain can be struck is of far more importance than whether or not there’s such a thing as an Obama Doctrine.  Over the long term, America’s hard power and soft power resides in its economic vitality.  A close reading of Obama’s rhetoric suggsts that he gets this point.  It will be very interesting to see if he decides to invest his political capital in cutting a deal. 

Developing…..