Sometimes the word to fear most out of congress is “compromise”. Typically it means both parties load up a bill with massive amounts of spending while simultaneously preaching the need for deficit reduction.

Once again that is the unsustainable path down which we are headed now that Obama signals possible tax compromise.

On the heels of the U.S. Senate’s rejection of his tax-cut plan, President Obama has signaled he is willing to compromise, according to media reports Sunday.

The Senate on Saturday turned back bids by Democrats to permanently extend middle-class tax cuts enacted during the Bush administration, while ending the rate reductions for the wealthy. The Senate move had been expected.

Later Saturday, Obama called the votes “very disappointing” but told Democratic leaders he would be open to discussions on extending tax-cuts for the wealthy in return for concessions from Republicans, The Wall Street Journal reported.

Divide and Conquer Fails

I discussed this setup on November 30, in Critical Middle-Class Tax Cut Vote Coming Up: Will Democrats Divide and Conquer Strategy Work?

Divide and Conquer

The Democrat strategy is to divide and conquer. Dare the Republicans to veto middle-income tax cuts, while delaying votes on everything else.

With procedural issues in the Senate the overriding factor, the question comes down to which party would get most of the blame if nothing passes. Sadly, that’s what’s become of politics.

There are several of ways this could progress:

1. Congress passes a bloated, unaffordable bill with every favor either side wants
2. Nothing passes at all
3. Something in between.

Let’s assess the odds of each scenario.

The Bloated, Unaffordable Option

Senator Durbin may cave into Republican wishes as long as he gets everything he wants (earned-income tax credit, the childcare tax credit, the ‘Making Work Pay’ credit, and extension of unemployment benefits).

Should that happen, expect one hell of a bloated tax bill which would prove the Republicans are hypocrites about reducing the deficit. It would also test Obama’s mettle given that he has stated the country can’t afford to borrow $700 billion to extend lower tax rates for top earners.

Would the president then veto the legislation?

I doubt it, and that would make Obama a hypocrite for signing the bill and the Republicans hypocrites for passing it. Unfortunately, neither side really cares about the “hypocrites label” given that hypocrisy is an everyday occurrence in both parties.

Thus, I believe passage of a bloated bill that both sides agree we cannot afford is the most likely possibility. Assume something like a 45% chance.

The Nothing Passes Option

It is certainly possible that nothing gets passed because of Senate infighting. Should that prove to be the case, it would be a forerunner of something that is all but guaranteed to happen in the next Congress.

If “nothing passes” expect a huge jump in bankruptcies and foreclosures and the economy to veer back towards recession, with everyone pointing the finger at everyone else.

Also expect Bernanke to go ape-sheet in unpredictable ways.

Bear in mind a huge jump in bankruptcies and foreclosures may be coming anyway, but passing noting will provide the opportunity for more political finger-pointing.

I rate “nothing passes” as the least likely possibility with something like a 15% chance.

The In-Between Scenario

In-between covers so much ground that it’s hard to address every case. Should this happen, I would think it would be closer to the “one hell of a bloated bill” than not.

Congressional Meaning of Compromise

To congress, the word “compromise” does not mean giving up anything you want. Instead, it means giving the other guy something you do not want him to have, in return for a similar favor.

The process is much like asking a group of kids at a birthday party if they want cherry pie, chocolate cake, or fudge for desert and if there is no consensus winner, everyone gets a full slice of each, with chocolate chip cookies thrown in for good measure because that’s what cousin Susie likes. It’s irrelevant whether or not cousin Susie is even at the party.

Is it any wonder there is never any lasting progress on reducing the deficit?

Some Real Compromises

I would gladly trade extending unemployment benefits for a ground-breaking compromise such as scrapping Davis-Bacon or ending Collective Bargaining for public unions. Indeed, that kind of innovative compromise would have me singing hallelujah from the top of Sears Tower.

Much less enthusiastically, I would accept extending unemployment benefits if the compromise was to cut military spending to pay for it. However, a compromise to extend unemployment benefits for a doubling of reductions anywhere else would be a very good deal, although light-years away from the ground-breaking deal I mentioned above.

The same applies to extending the tax cuts for the wealthy. Fine, I am all in favor of extending tax cuts, but the Republicans should have to give up something they want to get it if they are serious about deficit reduction. Again, I would suggest a big enough reduction in military spending to cover it or better yet doubling a reduction in military spending to cover it.

There is amazingly fertile ground for real compromises. Unfortunately, another “green shoot” opportunity for genuine compromise is about to wither on the vine.

If this “compromise” farce passes as now expected, Obama and the Republicans are both hypocrites. So what else is new?

Mike “Mish” Shedlock
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