The general impression in the media is that there was “no news” in the statement President Obama made in the late afternoon yesterday. In one sense that’s true. But on another level, the statement reflected a substantial change in White House strategy for the better.
That’s because as I outlined on December 10 there have always been two different ways of averting the economic problems associated with the fiscal cliff. One—which I’ll call the “lesser bargain”—is an effort to reach a de minimis agreement that avoids middle class tax increases and minimizes short-term spending cuts while reducing the long-term budget deficit relative to the current policy baseline. The other is the quest for a true “grand bargain.” A deal that attempts to “fix the debt” by doing more tax hikes and more long-term spending cuts and then perhaps tries to reduce the perverse economic impact by adding on short-term stimulus.
The quest for the lesser bargain is important because achieving it will improve the short-term economic picture. The grand bargain, by contrast, is impossible and pointless and its relentless pursuit is positively harmful since it generates these damaging crises.
Yesterday afternoon Obama hardly came around to my big-picture objections to grand bargaineering. But he seemed to have reached the conclusion that he wasn’t interested in offering any more concessions than have already been offered, so it’s time to pivot from the grand bargain in the short-term and work on a lesser bargain instead. Officially Obama’s idea is that we try to do the lesser bargain now, and then that gives us plenty of time to keep working toward the grand bargain. That’d be a mistake. What Obama ought to do is try to reach a lesser bargain as soon as possible and then shift to addressing almost any other problem under the sun. But however it ends up, it was a step in the right direction.