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Stumbling towards the cliff

Published in the Sunday Herald on December 30, 2012.

In two days time, the price of milk will double in the USA. It says much about the dysfunctional state of American politics than nobody seems inclined to do anything about it.

As Congress stumbles towards a massive package of tax rises and spending cuts known as “the fiscal cliff,” the rising cost of dairy products would seem to be the least of its worries, but the failure to agree a deal on a comparatively simple farm bill is emblematic of the legislative paralysis gripping Washington D.C..

Agricultural subsidy rates must be reset every five years. If not, a payment scale calculated in President Harry Truman’s time goes into effect, requiring the government to buy milk at wildly inflated prices. A new farm bill passed in the Senate with bi-partisan support, but died in the House of Representatives, unable to muster enough votes from the Republican majority. Welcome to Capitol Hill.

Truman famously described the lawmakers he worked with from 1947-48 as the “do nothing Congress,” but compared with the latest batch, their record looks energetic. They passed 906 bills into law. In the last two years, with Republicans in charge of the House and Democrats controlling the Senate, only 219 new bills have reached Barack Obama’s desk.

“We have been studying Washington politics and Congress for more than forty years, and never have we seen them this dysfunctional,” wrote Thomas Mann of the liberal Brookings Institution and Norm Ornstein of the conservative American Enterprise Institute. “In our past writings, we have criticised both parties when we believed it was warranted. Today, however, we have no choice but to acknowledge that the core of the problem lies with the Republican Party.”

Ever since President Obama’s re-election, his top priority has been to reach a deal on debt reduction to forestall the automatic tax rises and spending cuts, but six weeks of infuriating negotiations have produced nothing like a workable compromise. The cliff is a poor metaphor – there will be no dramatic plunge on January 1 – but in the words of Senate Majority Leader Harry Reid: “it looks like that’s where we’re headed.”

Some of the effects will be felt straight away. For two million Americans, it means an abrupt end to federal unemployment benefits worth an average of $290 a week. Another million will lose their dole money by March.

The child tax credit for a single mother working full time at the minimum wage will be cut from $1,725 to $165. A payroll tax cut worth around $1,000 to a typical middle-class household will expire. The top marginal tax rate on income above $250,000 per year will revert to 39.6%, the level under President Bill Clinton, although it is important to note that any changes to the tax code passed by the new Congress could be backdated to the start of the year.

In total, the expiration of the Bush tax cuts is worth more than $5 trillion over a decade. The spending cuts amount to $1.2 trillion over ten years. It is inconceivable that nothing will be done to address this long term but there is no incentive for either side to reach an agreement now.

On Friday, Obama called a bi-partisan summit, bringing leading Republicans and Democrats together, but it was all for show. When the President rushed back from his Hawaiian holiday and Reid railed against House Republicans “watching television” while the Senate tried to reach a deal, it was inevitable that House Speaker John Boehner would recall his colleagues to Washington too, for appearances sake.

The two parties spent the final days blaming each other for inaction. Reid accused Boehner of running the House like “a dictatorship,” because of his refusal to pass a Senate bill cutting taxes on the first $250,000 of income with Democratic support. Boehner responded that Reid “should talk less and legislate more,” and pointed out that House Republicans have passed a bill keeping taxes at current rates and shifting the defence cuts onto domestic spending. In short, each has drafted legislation that the other party cannot stomach.

Obama called Friday’s meeting “constructive,” but also used the White House bully pulpit to express his frustration. “The American people are not going to have any patience for a politically self-inflicted wound to our economy,” he said.

The Wall Street Journal’s behind-the-scenes look at negotiations concluded that “the talks poisoned an already distrustful relationship” between Obama and Boehner. At one point, Boehner told the president “I put $800 billion [in increased tax revenue] on the table. What do I get for that?” “You get nothing,” replied Obama. “I get that for free.”

This, more than the slim mandate he won in November’s election, is what strengthens Obama’s hand. Higher taxes on the richest 1% of Americans are supported by a large majority of all voters. Once the Bush tax cuts expire, a bill to cut taxes on income below $250,000 – thus generating more than $700 billion in revenue – would be hard for Republicans to turn down. Obama can do nothing and come out on top.

Polls show that voters blame the Grand Old Party for the impasse, with 54% approving of the way Obama has handled negotiations and just 26% saying the same for Boehner. The spending cuts will hit the military hardest. On the left, many believe that no deal is a good deal.

Obama has demonstrated his willingness to cut cherished progressive programmes. His final offer raised the threshold for higher taxes to $400,000 a year, ditched the payroll tax extension and introduced a new, stingier way of calculating Social Security payments. Raising the eligibility age for Medicare was up for discussion, but Boehner walked away.

From a political standpoint, this makes sense. Boehner cannot be accused of selling out by hardliners, who would stage a coup to remove him as Speaker if he passed a bill to raise taxes with Democratic support. Senate Minority Leader Mitch McConnell faces the prospect of a Tea Party challenger next year when he runs for re-election in Kentucky. If they refuse to compromise now, they can strike a deal in January without being accused of betrayal, because by then it will involve cutting, not raising, taxes – even though the end result will be the same.

Obama expressed “modest optimism” that Reid and McConnell could pass a stopgap measure in the Senate, for Boehner to put before the House, but as doing so would conceivably cost both Republican leaders their jobs, it was hard to disagree with Senator Bob Corker that Friday’s last ditch talks were “an optical meeting, not a substantive meeting.” Both sides want to be seen trying, even though there is little hope of success.

Last week, Boehner attempted to pass a measure he called “Plan B” in the House, retaining the Bush tax cuts for all income below $1 million. The bill, which cut the child tax credit and restored money to the defence budget, stood no chance of getting through the Senate, let alone past Obama’s veto, but to general astonishment, it also failed to reach the floor of the House because too few Republican representatives would sanction any sort of tax rise, even on the richest 0.2% of the population.

Asked how he expected to reach an agreement with the president, when his own caucus would not even support such a small, symbolic concession, Boehner responded “God only knows.” He then read the serenity prayer aloud (“God grant me the serenity to accept the things I cannot change, courage to change the things I can…”) and sent his members home for Christmas.

As the Republican party has drifted to the right in the past two decades, the change has been felt most acutely at the level of political process. An absolute refusal to give an inch of ground to Democrats has become standard practice.

This is partly down to the Tea Party wave of 2010 that sent so many new representatives to Congress with a strong anti-government mandate, and partly a result of the re-districting that followed, gerrymandering scores of safe Republican seats where the only contest an incumbent need fear is a primary challenge from the right.

There are now two breeds of congressional Republicans: true believers in small government who will never vote for a tax increase, and comparative moderates who must be wary of being called RINOs – Republicans In Name Only – and hunted down.

Some, like Steve LaTourette, a congressman from Ohio, have given up genuflecting to the radicals. He is retiring tomorrow and can speak his mind. The failure to reach a deal “weakens the entire Republican Party,” he said, by making it appear to be “a bunch of extremists that can’t even get a majority of our own party to support policies we’re putting forward.”

The new Congress will be slightly more liberal, as a result of Democratic gains in the Senate and House elections, but control remains unchanged. Gridlock is the new normal. And whatever bargain the two parties strike on taxes and spending, it will only be a prelude to the next episode of high stakes brinkmanship with the US economy.

On Wednesday, Treasury Secretary Tim Geithner confirmed that the statutory debt ceiling of $16.4 trillion will be reached on New Year’s Eve. The government can continue to pay its bills until February or March using “extraordinary measures” – accounting gimmicks shifting money from one fund to another – but at that point, another showdown over borrowing is inevitable.

During last year’s tortuous debt ceiling negotiations, Standard & Poor’s downgraded the credit rating of US Treasury bonds, causing a short, sharp market crash. The White House has said that it will not trade more spending cuts for a higher debt limit, but it is unthinkable that congressional Republicans will approve an increase without extracting major concessions. They have already shown that they will sabotage the economy to win political battles.

“Ordinary folks, they do their jobs. They meet deadlines. They sit down and they discuss things, and then things happen,” said Obama. “The notion that our elected leadership can’t do the same is mind-boggling to them.” But with congressional approval ratings at an all-time low, few expect a New Year’s resolution on Capitol Hill.

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