November 30, 2012 6:27 pm

Headed for the US fiscal cliff

Republicans will lose more from another game of chicken

The spell of post-election “happy talk” on the US fiscal cliff is officially over. Nobody expected it to last – the two parties remain as far apart as ever. While most insiders still expect a deal before December 31 to avert an automatic $500bn fiscal contraction, the odds are lengthening.

This week Republicans described Barack Obama’s opening offer as “a break with reality”. On Friday the president reiterated that no deal would be possible without higher rates on the wealthiest 2 per cent of the population. Neither has budged.

With stakes this high, and a 2013 recession as one outcome, it is vitally important that the cliff is averted comfortably within schedule. There are two reasons why a timely resolution is overwhelmingly in the interests both of Republicans and Mr Obama. First, when you play chicken it sometimes goes wrong. Even when a collision is avoided, the damage can be great. The showdown over the debt ceiling in August 2011 did not culminate in default. But the US nevertheless lost its triple A credit rating. Then, as now, the markets were most nervous about US political risk – Washington’s capacity to impose self-inflicted damage on the economy. Taking it up to the last minute is no way to allay those fears.

Second, another nail-biting December would poison the climate for the far bigger talks on a grand bargain in 2013. To be sure, any deal to avert the cliff before December 31 must lay out a road map for negotiating a larger fiscal overhaul next year. Both sides will also be aware that any concessions they make on the cliff could skew the 2013 talks. But Republicans should keep their focus on the bigger picture. This week Mr Obama proposed a $1,600bn rise in tax revenues in the next decade and $400bn in cuts to entitlements, chiefly Medicare. He also proposed to make increases in the sovereign debt ceiling automatic. It was a strong opening bid. The Republicans need to think hard about their response.

There is an assumption that Republicans could persuade Mr Obama to agree to steeper Medicare cuts, or to a reduction in the proposed tax increase. That might be possible. But they should remember that Mr Obama was burnt once before (in August 2011) after offering unrequited concessions and he is unlikely to bargain so freely again. Agreeing to a minor increase in taxes on the wealthiest would be a small price to pay both to avert the fiscal cliff and to set up a far bigger negotiation for 2013.

Instead of playing chicken, Republicans should try governing. Polls suggest they have much more to lose than Democrats from going over the cliff. They would therefore have much more to gain from averting it.

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