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I’m shocked. Shocked. Last night’s Plan B debacle proves Washington is dysfunctional. Who would have thunk it?

posted on December 21, 2012 at 10:32 am
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Surely you didn’t expect global financial markets to react positively to last night’s debacle in the House of Representatives?

Overnight, after a revolt among conservative Republican members forced House Speaker John Boehner to pull his solution to the U.S. fiscal cliff, Hong Kong’s Hang Seng index dropped 0.68% and Tokyo’ Nikkei 225 index fell 0.99%. As morning rolled across the world, the Germany DAX index declined by 0.74% and the French CAC 40 index moved 0.46% lower. In the United States as of 10 a.m. New York time the Dow Jones Industrial Average is down by 0.82% and the Standard & Poor’s 500 was down 1.18%.

From a cynical U.S. perspective (and is there any other appropriate perspective on U.S. politics these days?), it’s hard to see what all the hoo-hah is about.

Boehner’s Plan B—a proposal to raise the marginal tax rates for taxpayers making more than $1 million and to extend the Bush tax cuts for everyone else—was never a real proposal with a chance to pass into law in the first place. It would have been dead on arrival in the Senate and President Barack Obama had promised to veto it.

It was a political stunt designed to embarrass Democrats—and not a particularly well-designed one to begin with.

And to even get the bill to a chance of passage in the theoretically Republican –controlled House, Boehner had to load it up with all kinds of spending cuts—to Food Stamps, for example—designed to appeal to the most conservative Republicans. But those additions made the bill even more repugnant to Democrats in the House and even less likely to pass the Senate.

So what’s the big deal? If it had passed would we be closer to a deal on the fiscal cliff? I think there’s a strong argument to be made that we’d be further away. This morning we’d be watching Boehner push a bill that stood no chance of passage. Granted Republicans packed their bags last night and went home for Christmas and so there are no negotiations today, but if Plan B had passed nobody would be engaged in serious talks today anyway.

In having to pull Plan B before it came to a vote, Boehner has actually delivered a strong dose of reality—always in short supply in Washington. Last night demonstrated Boehner’s inability to deliver the votes of his own caucus for a proposal that he crafted. And that testifies to the reality that the Speaker can’t deliver a majority of Republican votes in the House if he were to strike a deal with the Democratic President and Senate.

That’s only a big deal if you thought Boehner had any real control over the Republican caucus in the House to begin with.  If you didn’t—and frankly I don’t see how anyone watching the post-election Republican party can think its leaders have any control over the conservative rank and file members of the House—then last night’s events aren’t especially surprising.

Before last night, the odds were that Congress was going to send the country off the fiscal cliff at the end of December. And that’s still the case.

Before last night, the only deal with a chance to pass the House and the Senate and get signed by the President would have had to be a bipartisan agreement able to attract a majority of Democratic votes and a sufficient minority of Republican votes. And that’s still the case.

In a perverse way last night’s debacle because it was so profoundly humiliating for Boehner and because it so clearly demonstrates Boehner’s inability to deliver his caucus on any deal with a chance of passing the Senate, clears the way for action in January. It’s one less piece of political grandstanding in the way of a solution. And it’s one big demonstration of how a coalition to fix the fiscal cliff will have to be assembled.

The big test—the one the markets should be focused on—is not whether Washington could get its act together to pass a fiscal cliff solution before the end of December. That was always extremely unlikely. The big test is whether Washington can act relatively quickly in January so that the economy can avoid real damage from the higher tax rates and lower spending targets that go into effect on January 1.

A little bit of a fall off the fiscal cliff isn’t going to send the economy into recession. But if our politicians are still staging political stunts at the end of January, then the economy is in real danger.

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16 comments

  • perdue on 21 December 2012

    The challenge (that you failed to discuss) is that bringing Democrats together around a bill isn’t going to be easy either. The situation’s the same: neither the President, nor the House or Senate leaders on the D side, has any magic ability to “deliver” on something they put together.

    The real issue is that there are there are unrealistic folks on both sides of the aisle: they don’t know how to add, so they think that “hands off entitlements” or “no new taxes” are responsible positions.

    Or you could say that the real issue is that the folks in Washington are just reflecting the fantasy views of their electorate. And you’d be right.

    We are in for many years of this, and national decline appears unavoidable.

  • drpearso on 21 December 2012

    As per your article above, we have to assume that there will be no solution this year (2012) for tax increases and spending cuts that were agreed/voted on last year (2011). After the debt ceiling increase was voted on August 2, 2011 the US credit rating was dropped August 5th 2011.

    From July 21, 2011 to August 10, 2011, the Dow dropped from 12,700 to 10,700 (2,000 points over 13 trading days). From the August 2, 2011 debt ceiling vote to August 8, 2011 the Dow dropped 1,400 point in only 5 trading days.

    Does anyone think that these kinds of drops (1,400 to 2,000 points) in the Dow over 5 to 13 trading days will happen in January 2013 since we will be going over the fiscal cliff? I’m interested in what folks think and/or anticipate. Regards

  • Jim Jubak on 21 December 2012

    Perdue, you’re right that the Dems aren’t a unified disciplined bloc. (Even putting Dems and disciplined in one sentence make me laugh.) But I think the numbers are substantially different. The “progressives” are a much smaller part of the Dem caucus than the “no taxes ever) are for the Reps.

  • elnormo on 21 December 2012

    You don’t need the support of either all democrats or all republicans to get something passed. Most republicans plus some democrats OR most democrats plus some republicans would work too (and the President of course.)

    So the real question is: are there enough liberal-ish republicans plus conservative-ish democrats to get something passed that the president will sign?

  • Tom on 21 December 2012

    Does anyone know what the projected federal deficits will be if the President’s proposals are adopted?

    The entire focus (pols & media) has been on whether the “wealthy” will pay higher taxes. As best I can tell, new tax revenues will be small relative to the deficits and spending will not be cut enough to make a difference.

    Possibly continued deficit spending will be good for the economy and the market for the short term but I worry about the medium and long term.

  • george lundin on 21 December 2012

    JJ:
    This was a fine column. Thanks for writing it to remind us that the system is not crazy and that there is still hope that lasting damage will be avoided in 2013.
    Please give us a post script in 30 days.
    GSL @ Seattle

  • orenv on 21 December 2012

    It would be interesting to see what the Senate could pass. So far, nothing, but at least we would know what would pass the senate too. Right now we don’t know if the house version would pass the Senate because the leadership in the Senate would not let it go for a vote. Hmm.

    I think the point of this is that the “other” side needs to put something on the table and so far it has nothing.

  • Altec on 21 December 2012

    Why do we need any tax cuts at all?

    All I hear about is the “Clinton” tax rates were magical and were responsible for the boom of the 1990′s. And the Bush tax cuts were responsible for the financial collapse.

    So why is everyone worried that we are going back to the Clinton tax rates? Good times are right around the corner.

  • eyedoc66 on 21 December 2012

    The politicians are arguing over tax increases and spending cuts that total 1.2 to 1.4 trillion dollars over 10 years. Yet, our deficit for 2012 alone totals over 1.2 trillion. Even if they eventually arrive at an agreement, they will be making only a small down payment on a real solution to our debt.

    The American public is ignorant of the depth of our fiscal problems and the real sacrifices that will be necessary if they are to be solved. Unfortunately, neither the president nor the congress has demonstrated the courage to tell them.

  • Cuchul on 22 December 2012

    We don’t have the money to continue to buy the votes the President needs. We have to stop spending money that is owed to others. By increasing taxes we get more money in the short run but may kill the golden goose.

  • Yclept on 22 December 2012

    I’m with Altec. The Clinton tax rates were no fairer than the present ones, but they did raise significantly more revenue. What we need right now is revenue.
    The cuts in social services will make things worse for the poor, and more of the middle class will sink into the poor classification, but from a macro-economic viewpoint, these people don’t have much disposable income now, so they are small contributors to the money spent by consumers.
    By 2014, I expect the outrage against the Norquist-bound tea party Republicans will be huge. They will be swept from office — it will be the “swan song” of the Republican party in general.
    Boehner? His slurred speech, yellow eyes, and jaundiced complexion lead me to believe he won’t be alive in 2014 without significant medical and alcoholic-recovery intervention. He won’t be a factor.
    I’ve been overweight short using primarily ETFs since last May. Obviously it was a mistake as it negated all gains in long positions and a bit more — fortunately the long positions over-performed and largely mitigated the short losses. I’ve shed much of my long exposure over the last month and have lots of cash ready to meter into short positions as the market continues to decline. I think the somnambulant bear has been poked enough with the stick and is about to roar and go on a rampage.

  • Gorm on 22 December 2012

    Markets move on perspectives. I contend when we go over the cliff, there will be this sudden AWARENESS that our leadership is dysfunctional, spending cuts and revenue increases necessary to materially reduce our deficits are unlikely. Combining this AWARENESS with the REALITY that Europe is sinking further in DEBT because of MORE contracting economies, and Japan’s malaise will persist unless JCB sought PRINTING devalues the yen, spikes exports, and renews growth, MARKETS have to come to SEE equities cannot overcome these many and growing obstacles!!
    There are just too many “ILLUSIONS of GRANDEUR” to juggle!!
    Gorm

  • mwp2634 on 22 December 2012

    Putting this critical problem in the hands of the United States Congress and Executive is like placing a loaded assault weapon into the hands of a metally unstable child.

    OOPS!

  • dermp1 on 23 December 2012

    When tax cuts are discussed, the wealthy and middle class were included with the Bush cuts, More people were taken off the tax roles. Any meaningful solution requires more than the wealthy- my understanding is that the tax revenues proposed amt to about 2 weeks of spending. To me a balanced approach includes spending buts that affect everyone and then taxes that affect everyone. Everyone talks about raise taxes on the wealthy but everyone is wealthy but me. I have many liberal acquaintances who think taxes are not high enough but when you say you can write a check for the IRS and Treasury, they tend to become less responsive to those tax increases. Free markets do work and when you have intrusive government intervention, freedoms become eroded.

  • kencccc on 23 December 2012

    Typical msnbc left wing non analysis of the gollums failure in the wh. Why would anyone of value even talk to him. We on the right have the votes to SHUTDOWN this failure of a government.

    The simple solutions have been adopted by even the socialists in spain and france … raise retirement age for ss.

  • semievolved on 24 December 2012

    kencccc
    The “simple” solution of austerity in the form of raising retirement age or reducing social security or medicare (here in the US) have never worked to bring an economy out of recession and they are clearly not working in Spain, Italy, Greece; they are only deepening and extending the problem. the euro experiment was flawed from the start because of each country’s inability to control their currency. Mighty, glorious, and pure Germany blames the others for their irresponsible ways while benefitting the most economically from exactly that behavior.

    The US is not comparable to the Euro bloc. We control our monetary system.

    Pro-growth, progressive policies enable an economy to recover and that in turn provides government incomes that can be used to pay down debts. Healthcare is the single biggest drain on government, corporate, and private resources yet we continue to sidestep the massive overhaul that is needed to fix that black hole.

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