Geithner Says Obama Willing To Go Over Fiscal Cliff: Game Theory Bluff Or Reality?

If republicans will not go along with tax hikes on the wealthy, then Geithner Willing To Go Over Fiscal Cliff.

Treasury Secretary Timothy Geithner said Wednesday that the Obama administration was willing to allow the economy to go over the fiscal cliff if Republicans did not agree to raise tax rates on the wealthy. In an interview with CNBC, Geithner drew a harder line in the sand than the White House previously has articulated. "There is no prospect of an agreement that doesn't involve those rates going up on the top 2%," he said. The Treasury Secretary repeated President Barack Obama's tough line that he would not negotiate with Republicans if they held the economy "hostage" to threats that the debt ceiling would not be lifted. At the same time, Geithner tried to sound optimistic that the two sides would reach a deficit-reduction framework. "I think you see the broad outlines of a framework now look more inevitable," he added. Reports to the contrary were "orchestrated drama."

Orchestrated Drama

I am amused at the idea Republicans will not cave in is "orchestrated drama". There is nothing purposely "orchestrated" about the setup.

Republicans brought this mess upon themselves out of arrogance, but game theory now suggests they have little to lose by telling Obama where to go. Likewise, president Obama has little incentive to bargain either.

Ironically, the US could stand a great deal of fiscal austerity. However, the sad reality is neither party has the decency to stand up and say to US citizens what needs to be said: We cannot afford the promises we have made on entitlements, nor can we afford our lavish military budget, nor can we afford to be the world's policeman with US troops in 140 countries.

So, instead of realistic compromises, we have to listen to demagogues in both political parties acting as if cuts in projected budget increases are the same as actual cuts in real spending.

The result is fiscal insanity and trillion dollar deficits for four consecutive years. Whether or not inability to face reality constitutes "drama" is clearly in the eyes of the beholder.

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