Obama’s Fiscal Cliff Irresponsibility

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By Josh Barro

After the Republicans' counteroffer on the fiscal cliff today, ABC's Jake Tapper tweeted a response from a senior White House official: "if GOP doesnt agree to higher rates for top 2%, we'll go over the cliff and the American people will hold them responsible." This is a hugely irresponsible threat from President Barack Obama's administration.

As Ezra Klein puts it, the fiscal cliff is really an "austerity crisis" -- without congressional action, automatic forces will bring too much fiscal austerity, too fast.

So why is President Obama threatening to block any solution to the austerity crisis unless it includes tax rate increases on the top 2 percent of Americans? A high-income tax increase doesn't do anything to solve the austerity crisis; in fact, it's a mild dose of austerity itself.

Usually, liberals defend the high-income tax increases on the grounds that they have a low fiscal multiplier, meaning there will be little short-term economic damage from a tax increase. Indeed, revenue from a high-income tax increase could be used to finance other fiscal stimulus, raising short-term economic growth.

But this perspective completely misses the politics of the fiscal cliff. The president has a variety of objectives, including avoiding the imposition of most austerity measures, implementing a little bit of additional stimulus and raising tax rates at the top. Republicans have other objectives, including avoiding tax rate increases and imposing near-term austerity.

As a result, insisting on raising taxes on the wealthy does not create room for other fiscal stimulus. It actually reduces the room for fiscal stimulus: If he holds the line on his tax demand, Obama has less ability to extract concessions from the Republicans on other austerity measures, like the sequesters.

The fiscal cliff discussions should be heading in the direction Matt Yglesias laid out last week: Obama should cave on his tax demand and Republicans on their austerity demands, leading to the minimum possible amount of austerity in 2013.

I suspect that is where Obama will end up, and that he is talking up the tax increase for political and tactical reasons. Appearing to be inflexible on the tax issue will motivate Republicans to give up more in order to gain his acquiescence, and tax increases on the rich are more popular than the anti- austerity policies needed to support the recovery in 2013.

But if that senior official isn't bluffing -- if the White House really is willing to risk an austerity crisis unless it gets its way on an unrelated policy matter -- then the Obama Administration is as irresponsible as it often accuses Republicans of being.

(Josh Barro is lead writer for the Ticker. E-mail him and follow him on Twitter.)

Read more breaking commentary from Bloomberg View at the Ticker.

-0- Dec/04/2012 00:35 GMT