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Mon Dec 31, 2012, 04:05 PM

Jared Bernstein on the cliff deal in the offing

As Ezra notes in the link above, the theory of the case for the WH is a) we avoid the cliff, finally break the R’s on tax rates, and get UI, and b) when we get to the debt ceiling fight, we’ll insist that for every dollar of spending cuts, there’s a dollar of new tax revenue. If the R’s want a trillion in spending cuts for a debt ceiling increase of that magnitude, the WH will only agree if a) the R’s identify the cuts–no more D’s doing that work for them, and b) any such cuts are accompanied by the same amount in new tax revenues.

OK—but what are you gonna do, WH, when R’s say, “forget it…let’s default?” Unless the President is willing at that point to tell his Treasury Secretary to go forth and borrow as needed—i.e., override the R’s—this plan will fail.

So, here’s my first blush response to this deal. The thing that worried me most in the endgame is that the WH would be so intent on a deal that they’d lock in too few revenues with no path back to the revenue well, and that they’d leave the debt ceiling hanging out there. Remember, the ultimate goal of Repubicans here is still to “starve the beast”–to shrink government by hacking away at both sides of its ledger–receipts and outlays.

Those fears will be realized unless the President really and truly refuses to negotiate on the debt ceiling and is willing to blow past those who would stage a strategic default. If he is not, and if this cliff deal passes, then I fear the WH may have squandered its hard won leverage.



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