Those who questioned whether the “fiscal cliff” was really a cliff may want to keep a close eye on North American stock markets Friday. There is a very present danger that they are headed straight down.
The biggest risk facing the world economy is in the hands of U.S. lawmakers and those lawmakers quite suddenly are flying blind after House Speaker John Boehner’s “Plan B” gambit failed spectacularly – and unexpectedly – Thursday evening.
“Don’t make me lie to you ... I have no idea what is happening,” Charles Rangel, a Democratic congressman from New York who has represented his state for more than four decades, said after Mr. Boehner cancelled a vote on his plan to shield Americans who earn less than $1-million (U.S.) a year from an automatic tax increase in 2013.
If you’re the type of person who reads a blog post on the “fiscal cliff” during the early hours of the Friday before Christmas, then you already know markets hate uncertainty. Defying all economic logic, Mr. Boehner shuttered the House of Representatives until after the holiday, choosing chaos over resolve.
“The House did not take up the tax measure today because it did not have sufficient support from our members to pass,” Mr. Boehner said in a statement late Thursday. “Now it is up to the president to work with Senator Reid on legislation to avert the fiscal cliff.”
Harry Reid, the Democratic majority leader in the Senate, isn’t likely to take the bait. The Senate is scheduled to be in session for a few hours Friday afternoon, according to the Washington Post, and then is set to break until Dec. 27. A spokesman for Mr. Reid called on Mr. Boehner to resume negotiations with President Barack Obama on a compromise to avert the “fiscal cliff,” the term that’s come to describe some $600-billion (U.S.) in tax increases and spending cuts scheduled to take effect in the New Year.
Economic forecasts from the Congressional Budge Office, the Federal Reserve, the International Monetary Fund, and the Bank of Canada say the “cliff” would cause a recession if left unaltered. U.S. stock futures tumbled and world markets fell after Mr. Boehner's move.
But while the economics of the “cliff” are clear, the politics suddenly are anything but.
On paper, an agreement between Mr. Obama and Mr. Boehner is within reach. In fact, it’s all but done. Mr. Boehner reversed Republican doctrine and embraced raising tax rates, albeit only on millionaires. Mr. Obama wants to tax rates to raise on incomes above $400,000, a shift from his campaign pledge of $250,000. Mr. Obama also agreed to curb Social Security benefits after saying earlier that he wanted to discuss the federal pension plan apart from the “cliff” talks. Both Mr. Obama and Mr. Boehner are proposing increasing revenue by roughly $1-trillion (U.S.) and cutting spending by the same amount, give or take a few hundred billion. A difference of that amount is trivial relative to anticipated revenue in 2013 of $2.6-trillion and projected spending of $3.6-trillion.
“The president’s main priority is to ensure that taxes don’t go up on 98 per cent of Americans and 97 per cent of small businesses in just a few short days,” White House spokesman Jay Carney said in a statement Thursday night. “The president will work with Congress to get this done and we are hopeful that we will be able to find a bipartisan solution quickly that protects the middle class and our economy.”
An optimistic read of that statement suggests the president might be willing to concede just a little bit more, which could allow Mr. Boehner to regain some political footing.
The decision to cancel the vote on “Plan B” is nothing but embarrassing for the Republican leadership in the House, which had guaranteed passage of a measure that would have given them some leverage in the budget talks. More than four dozen Republicans were either on the fence on the idea of voting to increase tax rates, or had already decided to refuse to do so, according to the Washington Post.
Mr. Boehner now has only three obvious options: He can stay silent and hope the constituents of the renegades in his party change the minds of their elected representatives over the holiday break; he can embrace the role of statesman and accept that to pass legislation, he will need the support of Democrats; or he can close his eyes and plunge over the “cliff.”
There is absolutely no indication at this stage which path he will choose, nor is there any indication of how willing the Democrats will be to offer Mr. Boehner a political lifeline. Complicating matters even more is the fact that Mr. Boehner‘s hold on the speakership now appears tenuous. The new House of Representatives elects its speaker on Jan. 3, and the winner must carry a clear majority. That clears the way for the Republicans who defied Mr. Boehner on Thursday to play spoiler in his bid to retain the Speaker’s gavel.
At an ill-fated meeting Thursday night to rally party unity, the Washington Post and Politico reported that Mr. Boehner recited the Serenity Prayer: “God, grant me the serenity to accept the things that I cannot change, the courage to change the things I can, and the wisdom to know the difference.”
Mr. Boehner isn’t known to openly express his faith that often. One can understand why would choose to do so Thursday night. The days ahead will be trying ones.