DAYTONA BEACH SHORES -- It is in the nature of critical negotiations, especially those with a deadline, that no deal can ever be reached until the last possible moment. This is primarily because neither side can be sure that they have reached the other side s bottom line until just before time runs out.
The negotiations to avoid the so-called fiscal cliff are especially complex because neither side knows if the other side has a bottom line, the Republican side may not be able to deliver on any deal acceptable to the Democrats, the Democrats have all of the short term advantages and are tempted to overplay their hand, both sides are attempting to negotiate in the media suggesting that neither believes the situation so dire as to force them to eschew political advantage, and the deadline is not entirely real.
So right now, as of this writing on Dec. 27, this is the situation: Each side is hoping to avoid a crisis while trying its best to avoid responsibility if the worst happens.
Neither side is really working on a solution to our overall fiscal problem, which must include tax increases, serious continuing spending cuts and significant reforms to our entitlement programs including Social Security, Medicare and Medicaid.
The Republican leadership compromised on principle and put forward a deal which included tax increases on the very wealthy but were unable to get the Republican members of the House to approve.
Speaker Boehner can now credibly claim that he put his office at risk for the sake of compromise and insist that the responsibility to craft a mutually acceptable solution lies with Obama and the Democrats in the Senate. However he cannot influence what that proposed solution might look like.
Obama advanced a proposal which would give him the tax increases and additional unemployment funding he wants now, delay the sequestration spending cuts which both sides fear and promises to think about unspecified other spending cuts at some vague future date.
Obama and his colleagues continue to argue that the Republicans are blocking a reasonable solution for the sake of the wealthy and are thus responsible for whatever may happen that is bad.
The media support Obama of course. Polls indicate that the people do as well.
Meanwhile we are less than a week away from the initial fiscal cliff.
The thing is - it s more like a fiscal slope. Washington understands this, even if the people do not.
That means that they know that they have more time to reach some kind of a solution and that suggests that they will fail to resolve the hard aspects of the problem while kicking the can father down the road for most of the rest of it.
Sort of a modified, limited can-kick.
It is not likely that any meaningful deal will be reached before the January first deadline. Let's see what it would mean if they don t agree by January first:
Everyone s taxes would automatically jump up to the levels before the Bush tax cuts.
Everyone s payroll taxes would increase. Certain taxes included in Obamacare will kick in (This will happen anyway).
The stock market would tumble and then gradually begin to recover. Some of the fall in the DOW will be priced in as we edge closer to January first.
All of this will be hardest on the average taxpayer and the longer these conditions last the harder it will get. This will be the period when the Republicans shoulder the maximum blame and Obama expects to pretty much receive a pass.
The Dems appear to be gambling that they can sustain this favorable political situation until the end of the first quarter of 2013 and beyond, giving them at least that long to bring pressure on the GOP to settle.
At some point during the first quarter the rating agencies, Moodys, Fitch and Standard & Poors will re-evaluate the credit rating of the dollar and, if we go over the cliff, probably further reduce that rating.
Even in light of the ongoing fall of the Euro, this could increase the interest we must pay to sell the debt instruments (Treasury bonds) which finance our annual deficit and without which our economy would collapse. Ultimately this will mean that we either raise even more taxes or borrow more to finance our current level of spending.
While all of this is going on I expect the Democratically-controlled Senate to put forward their solution to the crisis.
No one knows exactly what it might look like but we can be sure that it will entail far more for the Dems than the proposal that the Republican-controlled House just rejected.
Since his re-election, President Obama has taken the position in discussion with the Republicans that he won and is therefore entitled to see all his dreams come true.
If the Senate proposal reflects that attitude, then it should include Obama's demand for tax increases only on everyone making over $250,000 per year, substantial tax increases on income from capital gains and dividends and on the inheritance tax, more stimulus spending, more funds for the extension of unemployment benefits for those who have been unemployed for longer than 99 weeks and perhaps the unilateral presidential right to increase the national debt limit without reference to Congress.
But the fly in Obama s ointment will be the recurring debt limit. On Dec. 31, government spending will exceed the current debt limit, though by fiddling the accounts a bit the Treasury Department can probably delay the true date when spending will exceed the limit until sometime in March.
But by that point the Congress will once again have to approve a debt limit increase. Obama needs this increase which must be approved by both houses of Congress. Obviously this will give the Republicans fresh leverage over the White House.
They will try to use that leverage to slow Obama s train and claw away from him some of the compromise ground which he has so far refused to cede.
If they succeed, a more fulsome deal may be struck around the time of the debt limit fight.
But it is hard to see the Dems giving up many of their demands for higher taxes on the rich and more spending. It is far more probable that the two sides will fail to agree on very much and simply kick the can on down the road once again.
Largely because there is no election until 2014, the Republicans are gambling that they can sustain the criticism which will fall on them in the first and even the second quarters of 2013.
By the end of the second quarter, in June, the harmful economic impact of Obama s spending increases, which will far outstrip any additional revenue which might come in from higher taxes on the rich, will become undeniable. GDP growth will slow.
Many believe that it will turn negative and that the country will fall back into recession. They may well be right.
At that point the GOP believes that it will be able successfully to make the argument that the Dems own the economy, that their remedies have made things worse and the GOP will then begin building its own strategies with the 2014 elections in mind.
I do not see a legislated solution to our fiscal crisis in the near future.
The 2012 elections failed to resolve the issues which divide the country and both the governmental and popular factions remain at daggers drawn. This should surprise no one as each side sees its most basic principles at risk and thus dares not compromise in any meaningful way.
The nation is in the throes of the fundamental leftward transformation that Obama promised. Demographics, immigration trends, and our educational system all support the national shift towards socialism.
My fear is that a great catastrophe will be necessary to bring the people to understand that we are embarked on the wrong course.
But there is no guarantee that we would emerge from catastrophe with renewed commitment to the traditions, practices and self-reliant values which formed the core of our great nation. History suggests that a dictatorship, of either the right or the left, would be equally or more likely.
But there is no guarantee that we would emerge from catastrophe with renewed commitment to the traditions, practices and self-reliant values which formed the core of our great nation. History suggests that a dictatorship, of either the right or the left, would be equally or more likely.
Our country is at a crossroads, struggling despite the election to decide finally which road to take. The legislative struggle over taxes and spending is merely a symptom of that struggle.