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Wednesday, December 19, 2012 7:07 PM


Fiscal Cliff Talks Stall On Veto Threat; Name-Calling Begins; Showdown Over "Plan B"; Obama's Fantasyland Statements


"Fiscal Cliff" Talks Turn Sour

Yesterday, the sides were so far apart on critical issues that I wondered how a deal could be made in two days. The market saw it otherwise, mainly on hype Obama Offers Concessions Regarding Tax on Wealthy.

Today is a different story as "Fiscal cliff" talks turn sour, Obama threatens veto.

Talks to avoid a fiscal crisis appeared to stall on Wednesday as President Barack Obama accused Republicans of digging in their heels due to a personal grudge against him, while a top Republican called the president "irrational."

Boehner and Obama have each offered substantial concessions that have made a deal look within reach. Obama has agreed to cuts in benefits for seniors, while Boehner has conceded to Obama's demand that taxes rise for the richest Americans.

However, the climate of goodwill has evaporated since Republicans announced plans on Tuesday to put an alternative tax plan to a vote in the House this week that would largely disregard the progress made so far in negotiations.

Obama threatened to veto the Republican measure, known as "Plan B," if Congress approved it.

Boehner's office slammed Obama for opposing their plan, which would raise taxes on households making more than $1 million a year and is a concession from longstanding Republican opposition to increasing any tax rates.

"The White House's opposition to a backup plan ... is growing more bizarre and irrational by the day," Boehner said through his spokesman, Brendan Buck.
Concession Nonsense

Reuters writers Matt Spetalnick and Mark Felsenthal said "Boehner and Obama have each offered substantial concessions that have made a deal look within reach."

What "substantial" concessions were those? This is how I stated things yesterday.

Significant Differences

  • There is a huge gap between $400,000 and $1,000,000 on tax hikes.
  • There is a huge gap between $400 billion and a $trillion on entitlement cuts.
  • Boehner wants a debt-ceiling deal to include spending cuts for every dollar upped.


The gaps that still remain are huge. Nonetheless, the stock market acts as if a deal is at hand.
To be sure, "token" concessions were made, but "substantial" is another matter.

White House Said to Tell Business Groups Talks Stall

Bloomberg reports White House Said to Tell Business Groups Talks Stall
Obama administration officials told leaders of business and financial services groups that negotiations with House Speaker John Boehner have deteriorated in the past 24 hours, a person familiar with the meeting said.

Obama said at the White House that he offered congressional Republicans a “fair deal” and accused them of “posturing” in the talks. Republicans need to “take the deal” he offered, the president said.

Boehner, who is pressing Obama to accept deeper spending cuts and a higher income threshold for tax-rate increases, said if the president doesn’t accept the Republican plan he’ll be responsible for “the largest tax increase in American history.”

The $4.6 trillion tax increase over the next decade, scheduled to start taking effect in January, would be about 2.3 percent of the U.S. gross domestic product. In those terms, it would be smaller than a 1942 tax increase during World War II, which was 5 percent of GDP according to the Treasury Department.
Who's Posturing?

Obama accused the Republicans of posturing. It's only posturing if the Republicans give in. Perhaps it is Obama who is posturing.

Perhaps both sides are posturing. If so, this is another case of the "pot calling the kettle black".

Showdown Over "Plan B"

Yahoo!Finance reports Boehner Challenges Obama With 'Plan B' Showdown
House Speaker John Boehner pressed his backup tax plan Wednesday despite a White House veto threat, saying it will be approved Thursday by the GOP-controlled House.

"Then the president will have a decision to make," Boehner said. "He can call on the Senate Democrats to pass that bill, or he can be responsible for the largest tax increase in American history."

Earlier in the day, President Barack Obama threatened to veto Boehner's "Plan B," pressing instead for a deal to avert the "fiscal cliff." He said the two sides were only a few hundred billion dollars apart, and he hoped to get the job done before Christmas.

"Plan B" calls for extending tax cuts for people making up to $1 million. The White House immediately rejected it Tuesday, saying it was unbalanced and didn't go far enough on seeking more revenue from the wealthy.

Obama said he would continue to work with Boehner and was prepared to do "tough things." But he said he would not compromise on his demand that he be given authority to raise the debt ceiling without Congress' approval.

"What separates us is probably a few hundred billion dollars," Obama said. "The idea that we would put our economy at risk because you can't bridge that gap doesn't make a lot of sense."
Obama's Fantasyland Statements

President Obama is in fantasyland, not only in terms of dollars but also in terms of the negotiation process itself.

For starters, on the issue of tax hikes, Boehner would hike taxes on those making $1,000,000 while the president wanted hikes on those making over $400,000. That is a huge difference.

The president would not negotiate on the debt ceiling.

On the issue of being only "a few hundred billion dollars" apart, I rather doubt it. But even if true, Obama would only give in a mere $50 billion on entitlement cuts.

Plan "B" is a Sham

On the other side of the coin, plan "B" which does not address the revenue side of the equation at all is certainly not fiscally prudent. In fact none of this negotiation is.

Unfortunately, there is still time to snatch defeat from the jaws of victory. In this case, victory is letting the fiscal cliff happen. The other alternatives do even less to address out-of-control budget deficits.

So, let the fiscal cliff happen.

It would be better yet if genuine deficit cuts were added on top of the fiscal cliff, instead of being negotiated away in January. Don't count on that because both parties are more interested in talking about reducing the deficit than actually doing something about it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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