'Fiscal Cliff' Crisis Is A Game Of Identity Politics

http://cdn2.spectator.co.uk/files/2012/11/Boehner-and-Obama.jpg

While the Mayan prophecy may have not been fulfilled, at the stroke of midnight tonight- an event might just come close to such  insatiable wrath.

A failure to strike a deal on Fiscal Policy in the United States (going 'over' the cliff) has been characterised as an event with horrific consequences. Cuts in welfare and social security, potential rise in taxes for middle-class families- even the prospect of tipping back into recession (this time, about 100 times worse than 2008-9) have worked to conjure up images of filth, degradation and of course, the inevitable decline of civilisation. 'What happens if I starve because all the stores are closed?', 'How am I going to get to work in the morning?' , 'What if the fiscal cliff sends us to oblivion, where we become savages and throw poop at each other?'- These are just a sample of the reactions concerning the crisis.

The most interesting part of the  negotiations is that these  aren't simply economic questions, but rather, a kind of like a hangover of the 2012 election- essentially,  an exercise of identity politics. 

The current negotiations are basically playing out, as Professor Ian Robertson says here, a bit like a game theory model. Looking at it this way, the negotiations, there is an acknowledgement that both Republicans (R) and Democrats (D) have mutual interests- in this case, not going into recession, not upsetting the markets (great job, guys), not losing the credit rating, and not raising taxes on that all-important middle class.  But while there are mutual interests, the main difference lies in the Bush Tax Cuts. (D) wishes to extend some of the tax cuts, mainly on middle-income earners, (R) wishes to extend all of them.  You can see, in Jacob Geller's play-off matrix, (which has quite a good value-system) that a deal is likely to be brokered, with (D) gaining slightly more leverage than (R). But, this model assumes that the mutual interest being brokered is one that avoids the cliff- in essence, that in understanding the choices within the matrix, you have to account for the wider values of the collective goal of stability.

So, what if Professor Robertson's third point- about the psychological tendency for Schadenfreude, is the most prevalent component of the negotiations? In this case, would either Obama or the GOP prefer 'going over the cliff'?'. This posits a different type of matrix- one in which long-term political advantage plays a more important role than a mutual aim to balance the economy. Indeed, if safeguarding the economy was the priority to either party, then the bill signed in 2010 mandating the deficit reduction probably wouldn't have passed so hastily anyway. Political advantage is obviously much harder to quantify, but I would guess that in the post-election climate, the GOP will probably bear much more of the blame for negative externalities as shown here.  Obama and Biden are unlikely to budge on their position, probably due to a perceived post election mandate,  and their own comprimises relating to entitlements and the Bush tax cuts. Republicans might think they can repeat 2010-11 mid-term action, where they could hold the administration hostage until tax cuts would be accepted, but a stronger and more resilient Obama is probably going to be more confrontational. I haven't attempted to quantify this particular scenario, but my guess would be that even in this situation, the GOP would lose more by refusing to budge from their position. Further, they would be hurt significantly more in the the 2014 mid-terms by refusing to compromise on tax, social security and entitlements than Obama or the Democrats would from maintaining their position.

From what I can see at the moment, a deal is likely to be struct around the 11th hour. That's because the fiscal cliff is really much more about the GOP trying to reassert a political identity after it's defeat earlier this year. Even in this case, the GOP finds itself damaged by the ideological positions it took since 2008- bolstering in tea-party social conservatives, letting notions of the 'small state' overshadow wider ideas of the 'just' state, as well as marginalising the minority groups of which their ideal cuts would impact the most. Boenher knows this too, which is why he'll probably be inclined to allow the tax rises on the richest 10% as well as significant cuts to the defence industry. Unfortunately, the GOP misappropriated the political mood of the nation, sticking to the same ideological positions that lost them the election. What the speaker should realise, is that folding right now, might help his party's long road to recovery come 2016.