I'm shocked. Shocked. Last night's Plan B debacle proves Washington is dysfunctional. Who would have thunk it?

12/21/2012 10:32 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Surely you didn’t expect global financial markets to react positively to last night’s debacle in the House of Representatives?

Overnight, after a revolt among conservative Republican members forced House Speaker John Boehner to pull his solution to the U.S. fiscal cliff, Hong Kong’s Hang Seng index dropped 0.68% and Tokyo’ Nikkei 225 index fell 0.99%. As morning rolled across the world, the Germany DAX index declined by 0.74% and the French CAC 40 index moved 0.46% lower. In the United States as of 10 a.m. New York time the Dow Jones Industrial Average is down by 0.82% and the Standard & Poor’s 500 was down 1.18%.

From a cynical U.S. perspective (and is there any other appropriate perspective on U.S. politics these days?), it’s hard to see what all the hoo-hah is about.

Boehner’s Plan B—a proposal to raise the marginal tax rates for taxpayers making more than $1 million and to extend the Bush tax cuts for everyone else—was never a real proposal with a chance to pass into law in the first place. It would have been dead on arrival in the Senate and President Barack Obama had promised to veto it.

It was a political stunt designed to embarrass Democrats—and not a particularly well-designed one to begin with.

And to even get the bill to a chance of passage in the theoretically Republican –controlled House, Boehner had to load it up with all kinds of spending cuts—to Food Stamps, for example—designed to appeal to the most conservative Republicans. But those additions made the bill even more repugnant to Democrats in the House and even less likely to pass the Senate.

So what’s the big deal? If it had passed would we be closer to a deal on the fiscal cliff? I think there’s a strong argument to be made that we’d be further away. This morning we’d be watching Boehner push a bill that stood no chance of passage. Granted Republicans packed their bags last night and went home for Christmas and so there are no negotiations today, but if Plan B had passed nobody would be engaged in serious talks today anyway.

In having to pull Plan B before it came to a vote, Boehner has actually delivered a strong dose of reality—always in short supply in Washington. Last night demonstrated Boehner’s inability to deliver the votes of his own caucus for a proposal that he crafted. And that testifies to the reality that the Speaker can’t deliver a majority of Republican votes in the House if he were to strike a deal with the Democratic President and Senate.

That’s only a big deal if you thought Boehner had any real control over the Republican caucus in the House to begin with.  If you didn’t—and frankly I don’t see how anyone watching the post-election Republican party can think its leaders have any control over the conservative rank and file members of the House—then last night’s events aren’t especially surprising.

Before last night, the odds were that Congress was going to send the country off the fiscal cliff at the end of December. And that’s still the case.

Before last night, the only deal with a chance to pass the House and the Senate and get signed by the President would have had to be a bipartisan agreement able to attract a majority of Democratic votes and a sufficient minority of Republican votes. And that’s still the case.

In a perverse way last night’s debacle because it was so profoundly humiliating for Boehner and because it so clearly demonstrates Boehner’s inability to deliver his caucus on any deal with a chance of passing the Senate, clears the way for action in January. It’s one less piece of political grandstanding in the way of a solution. And it’s one big demonstration of how a coalition to fix the fiscal cliff will have to be assembled.

The big test—the one the markets should be focused on—is not whether Washington could get its act together to pass a fiscal cliff solution before the end of December. That was always extremely unlikely. The big test is whether Washington can act relatively quickly in January so that the economy can avoid real damage from the higher tax rates and lower spending targets that go into effect on January 1.

A little bit of a fall off the fiscal cliff isn’t going to send the economy into recession. But if our politicians are still staging political stunts at the end of January, then the economy is in real danger.

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