I have tried to avoid talk of the whole fiscal cliff. It is a bit overblown. Sure if all of the tax increases and spending cuts go into place and stay in place then it will be contractionary. However if they are just in place for a short time and people believe that they will soon be reversed it should have very mild effect. It is really more like a fiscal 'slow decline'. The biggest impact of failing to avoid the 'cliff' this week may come through expectations. The failure to avoid the 'cliff' will be be strong evidence that Washington has lost the ability to make big tough decisions - and that could hurt the markets (well it already probably has).
However the whole Plan B fiasco is interesting (see here and here). For days Speaker Boehner had been touting his Plan B proposal which would extend tax cuts to all persons with income less than 1MM USD. But the House did not even vote on the bill as the Speaker acknowledged that he did not have the votes on his side of the aisle to pass it. So why go touting Plan B as an alternative if (1) he knows it is a non-starter for the Senate and the President (2) he couldn't get his own caucus to agree to it (3) he was going to get little to no support from House Democrats on it? It ended up making the Speaker look weak and unable to count. It turned out to be a self inflicted wound. So why did he go so public with the plan before he knew he could even get his caucus to support it? Well maybe he really can't count..or...or
The Speaker has two problems (1) he wants to get a bill to avoid going over the 'cliff' for which Republicans will shoulder a disproportionate amount of the blame (2) he wants to get re-elected as Speaker. As Nate Silver pointed out here the Speaker has an arithmetic problem in the House. The House is made up of approximately 186 liberal Democrats, 14 Blue Dog Democrats, 182 establishment Republicans, and 51 Tea Party Republicans. He needs to get 217 votes to pass a bill. If the Speaker wants to pass a bill with just Republican votes he needs 35 of the 51 Tea Party Republicans to go along with it. If he can count on getting all of the Blue Dog Democrats to back his plan he still needs the votes of 21 of the 51 Tea Party Republicans. If he has to count on liberal Democrats to pass a bill then he will have to move the bill in their direction. This will have two bad effects for the Speaker (1) if he moves the bill left he will lose even more of his caucus (2) he could anger some on the right of his party - just at the time that he will need their votes to get re-elected as Speaker.
A few weeks back we heard how a few Republican's were abandoning the no new taxes pledge to Grover Norquist (see here). But the story turned out to be nearly irrelevant. The Senate and President are not going to agree to a bill unless there are some increased revenues (ie taxes on the wealthy) in it. In order to pass such a bill the Speaker doesn't need a few Republicans to abandon the no new tax pledge ...he needs all of the establishment Republicans and nearly half of the Tea Party Republican's to abandon the no new taxes pledge. And that is not going to happen.
So what did - publicly proposing Plan B only to see it fail - do for the Speaker? (1) it may have bought him some time to get past the Speaker's vote. By proposing Plan B it appears that he is trying. Once he is re-elected as Speaker then he can start negotiating with House Democrats on a bill which will include tax increases on the wealthy. But in the mean time he does not want to say that he is stalling for time. (2) It gave him cover with establishment Republicans. By putting up a watered down version of the Obama plan and seeing it shot down in his caucus it demonstrated to establishment Republicans that in order to get a bill that can turn into law the Speaker is going to have to get some House Democrats to support it. Hence he is going to have to move even further left. (3) Or maybe he just can't count.
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