The Fiscal Cliff is still unresolved.

Over the past couple of days, the White House has taken a lot of heat from liberals for agreeing to using chained-CPI in Social Security. Different writers have lashed out at such a deal and argued that the President is back to “negotiating with himself.” Many of these liberals see going over the fiscal cliff as better than the deal Obama is currently offering. They believe that going over the cliff will give Obama more leverage in the negotiations and allow him to extract a better deal from Republicans. However, I’m very skeptical of this for three reasons:

First, the President is in such a great position now because Republicans really don’t want the Bush tax cuts to expire for anyone. The President wants to extend the tax cuts as well, just not for those making $250,000 a year or more (his most recent offer upped this amount to $400,000). In his counteroffer, House speaker John Boehner agreed to raise rates on those making more than a $1,000,000.

But the rates on everyone automatically rise on January 1st (though its effects don’t occur for a few months). This where the President’s leverage comes from. He would sign a bill extending the tax cuts for the middle class, but Republicans won’t because they want to extend rates for the upper class (and small businesses) as well. That’s why the President can say:

It’s unacceptable for some Republicans in Congress to hold middle class tax cuts hostage simply because they refuse to let tax rates go up on the wealthiest Americans

The polling has largely backed up the President, with the American people blaming Republicans for not compromising.

The thing that many liberals have overlooked is that this can change quickly. Boehner’s offer to raise rates on those making over a $1,000,000 may not be much substantively, but it represents a big shift in the Republican party. For years now, the Republicans have adamantly refused to raise taxes. Period. End of question.

Now, the Speaker is finally offering to let taxes rise on the wealthiest Americans. The American people may see this as a major compromise for Republicans and believe that the President is now holding the middle tax cuts hostage. I haven’t seen any polling since Boehner submitted this offer to the President,  but I’d be very interested in it. If we go over the fiscal cliff, it’s possible that Obama could receive much of the blame. That would certainly put him in a much worse bargaining position.

Second, a number of liberals have suggested it would be fine to go over the fiscal cliff. And, policy-wise, it would be. Almost all of the cuts occur over time and do not immediately wreck the economy. The one cut that happens immediately is the  expiration of the payroll tax cut and that doesn’t seem to be part of a deal anyways. However, liberals are overlooking the economic impact of political dysfunction. Uncertainty has already hurt the economy and will continue to do so, especially if we go over the cliff.

In addition, with every subsequent crisis, investors have lost confidence in the American political system. This may not show up in the interest rate on U.S. Treasuries, but that’s a result of political incompetence throughout the rest of the world. The U.S. system may look good relative to it, but make no mistake, investors are worried about American political dysfunction.

Matthew Yglesias brushed this off today, but it’s a real concern. Every time the country has had to make a big decision over the past few years, our political system has failed. At some point, investors aren’t going to believe that the U.S. has the political capabilities to solve its problems. They may become skeptical that the US will actually raise its debt ceiling.

Third, going over the fiscal cliff also moves us closer and closer to the debt ceiling where Republicans have the leverage. The President has rightly said that he will not negotiate over the debt ceiling. That doesn’t mean the Republicans won’t weaponize it. They certainly will and at the very least, it will become a thorn in Obama’s side. At worst, the American people blame Obama for not compromising with Republicans on it.

Obama cannot simply ignore these three major issues. Going over the cliff will certainly harm the economy and potentially puts the President in a worse bargaining position. Liberals who assume that he can get something better by going over it are making a huge assumption and ignoring the economic impacts of doing so. This is why Obama has agreed to using chained-CPI for social security. It’s why he’s agreed to a number of other spending cuts as well. Democrats may not like those cut (I don’t), but they have to realize why he’s doing it: President Obama’s leverage is not as strong as liberals think it is. (Image via).