By Chris LaPage

The President proposes $1.6 billion in new tax revenue, extending payroll tax cut, $50 billion of spending on infrastructure projects and complete executive control of the debt ceiling borrowing limit.  In addition, the President's proposal called for $400-600 billion in spending cuts that are not completely delineated.

Republicans dismiss President's offer.  John Boehner says, "We're nowhere, period.  We're nowhere."

Anyone looking for an update as to where the negotiations on averting the fiscal staircase (see November FUNDED article on why we don't use the term cliff) are in early December will likely come across the aforementioned statements and quotes attributed to senior politicians involved in the process.  At face value, the President's proposal and reaction of Republican leadership paint a grim picture as to the state of negotiations. If no deal is reached, income taxes will be raised across the board and approximately $55 billion in non-defense spending cuts will automatically be triggered for Fiscal Year 2013.  Going down the staircase would have huge ramifications for the economy, increasing the potential for a second recession while decreasing funding levels for critically important federal grant programs. With so little time left to negotiate, many readers will take such statements to mean that going down the fiscal staircase is not just a possibility, but a probable event. 

However, the truth is that you can rarely take political rhetoric, particularly when revenue and spending cuts are on the table, at face value.  No one expects the heavy lifting to take place until mid-December, at the earliest.  At this point, the respective parties are still making attempts to feel out their own political bases and influence public opinion in the process.  The President's proposal is demonstrating a clear sign to his left-leaning base that he learned from the debt ceiling negotiations last year.  He is advocating a position that puts most the deficit reduction on the wealthy and refusing to negotiate from the middle as he did the last time around. The President is also connecting the key points of his plan to the principles of his recent election campaign. In other words, by the public choosing Obama over Romney, implicit in that decision was the public's agreement that the wealthy must shoulder the bulk of the burden when it comes to deficit reduction.  In that sense, Obama is using a hardball negotiating technique and purposely asking for much more tax revenue than he is likely to get out of a compromise.

The Republican leadership is battling public perception for the most part. The election and subsequent exit polling data suggests the President is on the right side of this argument. In fact, polling indicates if we go down the staircase, most Americans will put the blame on Republicans in Congress. Republicans have gone out of their way to indicate that they are willing to put revenue on the table, in the context of closing loopholes rather than increasing tax rates on anyone, including the wealthy. By rejecting the President's offer, they are simultaneously pacifying their conservative base while insinuating to the general public that the President is not taking the process seriously. In other words, Boehner and Republicans are planting the seed that while they've moved to the middle and are negotiating in good faith, the President is moving in the opposite direction.  Many pundits agree that because the Bush Tax Cuts automatically expire, the President is in an advantageous negotiating position. And some have even gone further to suggest the President's negotiation position improves if we go down the fiscal staircase.  Reading between the lines, it becomes evident that if the Republicans want to avoid the staircase and declining bargaining position associated with it, they must sway public opinion so that the President  shoulders more responsibility should negotiations fail and the fiscal staircase is realized. 

In that context, the Republicans must continue to work the public opinion side no matter where the negotiations are headed.  Even as they work to strike a deal they must continue to insinuate and point out that the President is obstructing progress whenever possible. This is one reason you will likely never hear an overly rosy assessment of the negotiations from the Republican side of the debate.  Another key point of contention for the Republicans to declare the negotiations are "nowhere" revolves around the spending cuts. Obama's proposal is purposefully vague in the specific areas where cuts are recommended. Neither side wants to be the first to propose major cuts or restructuring of popular entitlement programs like Social Security and Medicare. The side that initially proposes those entitlement reforms will face angry senior citizens in the next election cycle. 

What you are likely to see over next couple weeks is some continued posturing around this sticking point. Republicans will continue to say the President's offer was not serious and that he needs to provide details on spending cuts. Obama and the White House will indicate that they will not negotiate with themselves and that the Republicans must offer a counter proposal. Furthermore, Obama is likely to insist that if the Republicans want entitlement program reform, they have to be the first propose those changes.  The good news is that a month really is an eternity when it comes to political negotiations. Considering the consequences across both sides of the aisle, reading between the lines indicates they are much closer to a deal than "nowhere".