The Fiscal Cliff Post-Mortem, Part 1: Putting the Deal in Context

The weakness of the fiscal cliff deal reflects the lack of direction coming from the White House.

I haven't written for a month largely because I thought it was one of those times when everything possible had been said about the fiscal cliff but not everyone had said it. Moreover, absolutely no one actually knew anything. Negotiations like this are "unknown unknowns" to everyone, including the participants. But with the fiscal cliff deal now done, I intend to write three brief pieces: The context of the deal, the deal and its immediate results, then the deal and its long-term results.

I'll get to the deal later. For now, suffice to say that -- even granting its one big positive, a more progressive income tax system -- the deal represents something close to a new standard for the smallest amount above nothing it is possible for intelligent people to accomplish in a negotiation.

But the most surprising and disappointing aspect of the post-election lame duck period was not this deal itself but the absence of a framework for any deal. This was a point on which I was simply wrong. I wrote in a number of places that I hoped a newly re-elected President Obama would quickly endorse Simpson-Bowles-Rivlin-Domenici. While I never predicted or expected this endorsement (I continue to believe the president has missed a huge opportunity here), I very clearly expected that he would create a framework, a road-map for where he wanted to go and what he wanted to do during his second term.

He didn't. As a result, we do not have, and the president doesn't have, anything close to such a framework right now.

The campaign and the election did not provide a framework. I've never really believed that campaigns were learning opportunities, and as I've come over decades to understand campaign consultants, I've realized that the last thing campaign managers want to do is have "teaching moments." And this particular campaign was even less of such a moment. Democrats wanted to tax whomever they defined as wealthy, but had no other ideas. And they faced a deeply flawed opposition candidate who was incapable of pushing them to develop any ideas. The Republican campaign from beginning to end was so completely incoherent that it is impossible, at least for me, to distill any organizing ideas or philosophy.

So we entered the post-election period absent any overall sense of direction. And I find it impossible to understand why the White House did not then provide such a sense of direction -- call it a governing philosophy -- immediately after the election.

What would such a philosophy be? I think it's obvious.

The second term of President Obama has to be focused on what is required to build the foundations for higher, more equitable, more sustainable economic growth. The difference between being caught for a long time in a two percent growth environment, as many predict, as opposed to a three percent to three-and-a-half percent growth rate -- which I think is possible -- is profound in terms of the health of American society.

Clearly a necessary but completely insufficient condition of the path toward higher sustainable growth of this kind has to be a long-term solution to the debt/deficit trap in which we are caught. But there is much more we must do, and the debt issue cannot be the whole of President Obama's second-term governing philosophy. But only President Obama can say what that governing philosophy is -- and he hasn't.

In the absence of such a philosophy or framework, it was completely inevitable that any fiscal deal would be the paltry, lowest common denominator result we ended up with.

There seem to be three theories as to how we reached this dismal point. They are not mutually exclusive.

First, the Obama covert socialist conspiracy, as promulgated by any number of conservative columnists: President Obama wants to make America into a new version of socialist Europe and this deal is step one. I give this about a 1 percent weight -- President Obama clearly did and does want a more progressive income tax system. But that's as far as it goes.

Second, the we are doomed hypothesis. America has become hopelessly polarized and ungovernable, and none of those poor members of the House or Senate could do anything of any scale or scope because they would be "primaried" and lose their jobs. There is considerable truth to this. The left and the right have mutually exclusive views of America and the Republican House in particular has lurched its way into an impossible corner. This polarization clearly limited the freedom of movement President Obama or anyone else had to reach an agreement. I give this a 45 percent weight.

But I think the third theory, the "if you don't known where you're going you'll get there" hypothesis, is at least as big a factor. This deal is the most a lame duck Congress -- indeed any Congress -- could conceivably ever come up with on its own. As we have learned time and time again, Congress does not make big policy, or establish major directions, or make trade-offs. It wasn't built to do any of this and it can't. The only possible source of intentional energy in our system is the presidency. If there is to be any sense of direction whatsoever, a president has to provide it. In this case, the president did not provide a sense of direction, Congress spun its wheels uselessly for a while, and inevitably the range of possible deals rapidly diminished until we reached this deal.

This cliff deal has one substantial positive feature: it creates a more progressive tax system. In fact, it creates the most progressive tax code since 1979. In my view, given the increase in earnings inequality the country has experienced, this is an unqualified good direction.

But it probably is very close to the last drop of new revenues that can be squeezed from this source. It is easy to be in favor of taxing someone else, which is why I never found it particularly interesting that the polling showed majorities in favor of taxing the wealthy. The next revenue increases will be much harder.

Beyond this achievement, the deal solves no known problems. It does not raise enough revenues. It does not cut or even reduce the growth of any expenditures. It leaves an immense long-term debt problem. It does not resolve the sequestration problem that last year's Super Committee left us. It does not solve the debt limit problem. It leaves the nation's public finances in a state of high uncertainty. It reduces the 2013 rate of economic growth by about one-half of a percentage point. And it almost guarantees a series of completely unproductive fights throughout this coming year.

If this is what you get when you try really hard, then a possible total closure of government in a few months looks pretty good.

Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the White Houses of two Democratic Presidents.