The Three Factors That Will Decide the Fiscal Cliff

John Boehner (R-Ohio), Speaker of the U.S. House of Representatives Photograph by Susan Walsh/AP Photo

If you want to understand what’s really happening in Washington, you have to be able to see through the spin. The spin on the fiscal cliff is that it’s an epic battle of wills between two evenly matched forces: Democrats, who want to raise taxes and cut spending, and Republicans, who refuse to budge on taxes. But that’s not really accurate. In the current issue of Bloomberg Businessweek, I explain why Obama and the Democrats have all the leverage and how that is likely to affect the outcome of the struggle. Since that piece was published, the president, House Speaker John Boehner, and Senate Minority Leader Mitch McConnell have all weighed in with their thoughts. To my ear, everything they said reinforced what I wrote.

Rather than an epic struggle between two parties, the fiscal cliff is better understood as three smaller struggles, each involving one of the key players. All three kicked off in earnest this weekend—their outcome will determine how the fiscal cliff is resolved. Here’s what to watch for in the days and weeks ahead.

Can Obama Persuade the Country? Obama won a second term, but despite the claims of some Democrats, he didn’t win a mandate. What he won is the chance to use the leverage of the fiscal cliff’s expiring Bush tax cuts and automatic spending cuts to try to reshape the budget to his liking. But that could well entail going over the cliff—and there’s no guarantee that the public will rally to his side. That’s why Obama did two things over the weekend. First, he reiterated his desire to decouple the Bush tax cuts for the rich (which he wants to end) from the Bush tax cuts for everybody else (which he wants to extend). Second, he let it be known that he’ll be campaigning across the country on behalf of this idea. What he’s really doing is trying to shape public opinion so that if we go over the cliff, Republicans in the House will be viewed as blocking his extension of the Bush cuts for the middle class and thereby forcing everybody’s taxes to go up. The proposition is that if he’s successful, public pressure will force Republicans to fold and cut a deal he likes.

Can John Boehner Control the Tea Party? House Speaker Boehner has the hardest job in Washington. Immediately after the election, he struck a “conciliatory tone” on the fiscal cliff, as the New York Times put it, and then told ABC News that Obamacare was the “law of the land” and wouldn’t be repealed. Boehner had to walk some of this back when a few members revolted. But he stuck to his guns in a weekend conference call with his caucus, telling them to get in line. Boehner’s challenge is essentially to lead his angry, disillusioned caucus out of the land of Tea Party make-believe where they’ve dwelled the past couple of years—a land where you can just say “no” to tax increases and win every time—and toward the realization that Obama holds most of the cards. If Republicans refuse to bargain, taxes will go up, and they’re likely to pay a steep price (see above). Boehner knows this. What remains to be seen is if he can get the right wing of his caucus to accept this, too.

Can Mitch McConnell Protect His Right Flank? Senate Minority Leader McConnell was the chief architect of the Republican strategy to deny Obama a second term—a strategy that failed. Ordinarily, McConnell’s ruthless pragmatism would be applied to steering his party away from the precipice of the fiscal cliff. But the day after the election, McConnell came out with an aggressive statement sharply at odds with Boehner’s note of conciliation: “The voters have not endorsed the failures or excesses of the president’s first term, they have simply given him more time to finish the job they asked him to do together with a Congress that restored balance to Washington after two years of one-party control.” McConnell sounded as averse to new taxes as any member of the Tea Party. That’s no accident: McConnell is up for reelection in 2014, meaning that he could draw a primary challenger as early as next year if he angers the Tea Party movement. That’s what happened to Trey Grayson, his hand-picked choice to fill Kentucky’s open Senate seat in 2010, who was challenged by Rand Paul and lost. If McConnell doesn’t feel he can manage the twin imperatives of protecting his party from disaster and saving his own career, he might opt to focus only on the latter—which would increase the odds that things blow up.

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