An interesting test for American politics

There are a lot of concerns rumbling around the wonkosphere that the United States is headed for a "fiscal cliff" at the end of this year.  Unless Congress acts, all $300 billion of the Bush tax cuts will expire, the $200 billion Obama payroll tax cut will expire, and $100 billion in spending will be automatically cut as per the debt deal from the summer of 2010.  Now, unless you reject Macroeconomics 101, you know that $600 billion in fiscal retrenchment in this economy practically guarantees a double-dip recession. 

Of course, Congress could change this if it acted in bipartisan fashion.  HA HA HA HA HA HA HA HA HA!!!  I kid, of course.  Except I don’t — any politial action to avert the fiscal cliff really would require some kind of bipartisan compromise. 

Earlier this week Josh Marshall posted an intriguing hypothesis about how the Democrats are thinking about this situation: 

For years and years now, the Democrats have been a much more fiscally responsible party than the Republicans. (Here, fiscally responsible means that they try to pay for the federal programs they support, not fiscally responsible in the way Republicans define it, where social spending programs are “fiscally irresponsible” even if they’re paid for.)

Republicans, by contrast, have intentionally drawn up big deficits with massive tax cuts, so that popular programs they don’t really like will eventually have to be cut. This is more or less the central organizing principle of the conservative movement, and the main way the conservative movement exerts control over the GOP. It’s no coincidence that when Republicans came back to power in 2011, they made deficits a huge legislative priority, and insisted on reducing them by cutting social programs alone.

The Democrats’ counter-strategy is a bit more subtle, but has essentially been to find ways to make it very uncomfortable for Republicans to maintain such a rigid anti-tax orthodoxy — to ultimately force Republicans to break their anti-tax pledges and badly splinter their party. That’s what the Buffett Rule is about; that why Dems insist they won’t dismantle the so-called “sequester” — big cuts to defense and even to Medicare — unless Republicans agree to tackle deficits in a balanced way, i.e. by supporting significant new tax revenues.

The results have been mixed. They’ve won a small number of GOP votes here and there, and vulnerable members are nowadays more likely to trash or dismiss Grover Norquist in the press than they were last year. But at a very high level within the Democratic Party, there’s a recognition that breaking the GOP on taxes is an absolutely crucial strategic imperative for defending safety net programs over the long term. Getting the revenue in a passive way is a second best option.

Now, if Marshall is correct, what’s interesting is that the Democrats have a powerful ally in this push to get the GOP to shift away from their anti-tax orthodoxy — Wall Street: 

Now that the US is facing the possibility of another budgetary showdown with potentially even higher stakes – the so-called “fiscal cliff” at the end of this year – Wall Street lobbyists are preparing an aggressive campaign to stop the political brinksmanship.

"The experience of last year taught everybody to be … focused on it earlier and not assume that this is business as usual,” said one bank lobbyist based in Washington. “People who had relied on government to respond eventually were surprised when it didn’t.”…

Different business sectors are preparing for the looming fiscal cliff with varying degrees of urgency. Among the most aggressive in pushing for a deal are defence contractors who would bear the brunt of the planned cuts to the Pentagon budget. Medical providers would also be hit hard by the automatic cuts. Companies that pay large dividends – such as utilities – would be slammed if the tax rate on dividends rise as scheduled from 15 per cent to more than 40 per cent.

But financial services companies also have a huge amount at stake. The question is how to influence the political process that remains gridlocked ahead of the November election….

Then there are tactical considerations. Though one bank lobbyist partly blamed a faction of congressional Republicans for last August’s debt ceiling showdown, saying they were “willing to go off the cliff with all flags flying”, it is unclear whether it is in Wall Street’s interest to take on some of their traditional allies on Capitol Hill by pushing them to accept higher revenues or tax increases in any deficit reduction deal, as Democrats are demanding.

The fiscal cliff is still a long way off in political time, but is the strategy having any effect?  Sort of.  We’re starting to see gravitas Republicans — real ones, too, not just MSNBC media darlings — calling for compromise.  Calls that are annoying Grover Norquist. 

And look — here’s a real live GOP Senator speaking tax heresy!

[Senator Lindsay] Graham says the debt crisis is so severe that the tax pledge — which says no tax loopholes can be eliminated unless every dollar raised by closing  loopholes goes to tax cuts — has got to go

"When you eliminate a deduction, it’s okay with me to use some of that money to get us out of debt. That’s where I disagree with the pledge," said Graham….

Graham said eliminating some deductions should free up money to lower tax rates — but also to pay down U.S. debt.

"I just think that makes a lot of sense. And if I’m willing to do that as a Republican, I’ve crossed a rubicon," said Graham.

This puts Graham at odds with his party’s leadership.

And look!  Real, actual negotiations in the Senate are taking place!  So, does this mean the Democrat/Wall Street strategy is paying dividends?  Will Tom Friedman and David Brooks soon be able to wax poetic about "statesmanlike" politicians cutting a Grand Bargain? 

No, not really.   

Jeb Bush is not an elected official any more.  Lindsey Graham is, but he likes to talk iconoclasm every once in a while, so I’m not sure how much weight it carries  (if it was Jim DeMint uttering these words, I’d be more convinced).  And let’s look a little closer at the New York Times story on the Senate negotiations, shall we?

Republican leaders remain largely on the sideline. Senator Jon Kyl of Arizona, the No. 2 Republican, applauded what he called “grass roots” negotiations, but conceded that neither he nor other party leaders had been directly involved, aside from efforts to stave off automatic defense cuts. Still, even he is making conciliatory comments on raising taxes, the issue that has kept Republican leaders from the table.

And this is on the Senate side — what really matters is whether the House GOP caucus will agree to any of this. 

In some ways, the next six months will be an excellent test of the roles that money and ideology play in current American party politics.  If money is the honey, then a deal will be cut, and well before December.  As the myriad articles suggest, what freaked out business wasn’t just the rank partisanship during the last debt deebacle, it was how close things got to a breakdown.  They don’t want to see that happen again. 

If ideology is what counts, however, then the House GOP won’t budge, if at all, until the last minute.  They don’t want to see taxes go up, but I’m not sure that they would be willing to make a compromise that would permanently eliminate tax deductions in order to preserve the status quo in income tax rates. 

What do you think?