The President is bluffing

I think the President is bluffing on his veto threat.

Conventional wisdom: To achieve his desired fiscal policy outcome (big tax rate increases on the rich), the President is willing to risk tax increases on all income tax filers.  He is also willing to risk the political blame for middle class Americans paying higher taxes because he thinks he can shift most of the political blame onto Republicans.  He is therefore willing to veto a bill he doesn’t like and bear the consequences of having no bill, if that’s what is needed to gain negotiating leverage.  His veto threat is credible.

This conventional wisdom makes three key assumptions.

  1. The President’s top economic policy priority is his fiscalpolicy goal (raising taxes on the rich).
  2. In a veto / no bill / blame game scenario, the President can shift most of the political blame to Republicans.
  3. He will make his veto decision on these two bases: fiscal policy and relative political blame.

Key flaw in the conventional wisdom:  The President’s veto decision is not about tax increases or political blame; it’s about causing a recession in 2013.

I make different assumptions.

  1. If there is no bill, the U.S. economy will probably dip into recession for much/most/all of 2013, and it’s impossible to predict whether such a recession would be short-lived.
  2. A 2013 recession would be terrible for the country and terrible for the Obama Presidency. It would limit the President’s options across his entire policy agenda, economic and non-economic.  And it could define and dominate his entire second term.
  3. President Obama believes #1 and #2, and therefore avoiding the risk of triggering a recession with his veto is an even higher policy priority than his fiscal policy goal.
  4. The President wants to get things done. He cares more about his own chances for policy success (across the entire breadth of his agenda, whenever he figures out what it is) than he cares about relative political blame.  A scenario in which Republicans get most of the blame for a veto-triggered recession is still a loser for him if it means he can’t accomplish his second term goals.

If my assumptions are correct, then the President cannot afford to veto a bill and have no compromise enacted.  Even if doing so increases dramatically the chance of getting his top fiscal policy priority, and even if he would bear only a small portion of the political blame for a legislative failure and the pain of broad-based tax increases, his veto would trigger a recession that would severely damage his agenda at least in 2013.

President Obama’s veto threat decision is not just about fiscal policy, and it’s not just about who gets blamed for a legislative failure.  It’s about whether the President wants to cause a recession in 2013 and hamstring his second term.  No matter what he or his advisors say, he cannot afford to take that risk.

(photo credit: Kaptain Kobold)

I escaped Washington, DC and now teach at Stanford's Graduate School of Business.

Posted in budget, economy, panel, taxes
21 comments on “The President is bluffing
  1. […] If my assumptions are correct, then the President cannot afford to veto a bill and have no compromise enacted. […]

  2. […] Hennessey believes that Obama’s threat to veto a Fiscal Cliff resolution bill he doesn’t like is a bluff because Obama can’t risk a recession in 2013. I’m unconvinced – I suspect his […]

  3. […] Keith Hennessey argued that Obama is bluffing in the fiscal cliff negotiations, that he wouldn’t let the country […]

  4. […] Keith Hennessey thinks that President Obama is bluffing on his veto threat. President Obama’s veto threat decision is not just about fiscal policy, and it’s not just about who gets blamed for a legislative failure.  It’s about whether the President wants to cause a recession in 2013 and hamstring his second term.  No matter what he or his advisors say, he cannot afford to take that risk. […]

  5. […] brings us to the second theory about who really has the leverage, espoused most recently by Hudson Institute fellow and former Bush administration econ adviser Keith […]

  6. […] economist Keith Hennessey wonders if President Obama is bluffing on his veto threat.  Hennessey writes: If my assumptions are correct, then the President cannot afford to veto a bill and have no […]

  7. […] should make a deal with the Democrats to get the best deal we possibly can.  Some even argue as Keith Hennessey does that Republicans actually have the negotiating […]

  8. […] economist Keith Hennessey wonders if President Obama is bluffing on his veto threat.  Hennessey writes: If my assumptions are correct, then the President cannot afford to veto a bill and have no […]

  9. […] Keith Hennessey, arguing that economic reality will force Obama to accept a deal much less to his liking than […]

  10. […] Last night, Krauthammer urged Republicans to hold strong: Along the same lines, Keith Hennessey argues that the president is bluffing: If there is no bill, the U.S. economy will probably dip into […]

  11. […] former Bush economic adviser Keith Hennessey notes, “the president is bluffing.” Obama cares much more about his second term agenda […]

  12. […] comes down to the wire with President Obama and wonders if it really must be that way. One reads Keith Hennessey and wonders if President Obama is willing to spend his entire eight years with a horrible economy […]

  13. […] why they voted for Obama. He won! Can’t you see that? He won!As former Bush economic adviser Keith Hennessey notes, “the president is bluffing.” Obama cares much more about his second term agenda […]

  14. […] Hennessey, a former director of the National Economic Council under George W. Bush, wrote that Obama’s threats to veto extension of the rates on high earners is a […]

  15. […] President Obama warns that the fiscal cliff could hurt Christmas spending. Keith Hennessey thinks the president is bluffing, and Michael Lind thinks the fiscal cliff is a lie. The president consults with […]

  16. […] President Obama warns that the fiscal cliff could hurt Christmas spending. Keith Hennessey thinks the president is bluffing, and Michael Lind thinks the fiscal cliff is a lie. The president consults with […]

  17. […] Obama warns that a mercantile precipice could harm Christmas spending. Keith Hennessey thinks the president is bluffing, and Michael Lind thinks the mercantile precipice is a lie. The boss consults with […]

  18. […] President Obama warns that the fiscal cliff could hurt Christmas spending. Keith Hennessey thinks the president is bluffing, and Michael Lind thinks the fiscal cliff is a lie. The president consults with […]

  19. […] President Obama warns that the fiscal cliffcould hurt Christmas spending. Keith Hennessey thinks the president is bluffing, and Michael Lind thinks the fiscal cliff is a lie. The president consults […]

  20. […] Obama warns that a mercantile precipice could harm Christmas spending. Keith Hennessey thinks the president is bluffing, and Michael Lind thinks the mercantile precipice is a lie. The boss consults with […]

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