“If Boehner can’t bring his plan B to a vote and win, he probably won’t be able to successfully sell any more comprehensive deal—and we go off the cliff.”

The quote above is from yesterday’s post. As you may have noticed, the world didn’t end last night, although it has changed significantly per that quote. Speaker Boehner could not bring his plan B to a vote—he pulled it once it was clear he didn’t have the votes—much less pass it, and now the complexion of the negotiations has changed again.

That’s an unfair headline, but what the heck. The big political and economic news in the U.S. this weekend was Speaker Boehner’s offer to allow higher tax rates on those making more than $1 million per year. That at least was the headline. But buried in the proposal was something more significant—an offer to extend the debt ceiling for at least another year or so.

The GOP—at least the portion of it not in safe, gerrymandered districts—is starting to recognize that, if the country does go off the cliff, the Democrats will get a lot of what their base wants—higher taxes, especially on the “rich,” and lower military spending—and the Republicans will get blamed by the Independents. Sure the country will suffer, but from a political point of view it doesn’t get much better than that for the Democrats. Boehner, who is speaking for the wing of the GOP that will be exposed in the next election cycle, is trying to cut a deal—or at least look as if he is doing so. As predicted, this is coming at the last minute.

So the big story today is that the Federal Reserve is now explicitly linking its interest rates to U.S. unemployment. It’s kind of the reverse of the Santa revelation. Remember when you found out that Santa wasn’t real? How you kind of knew it but weren’t happy to have it confirmed? Now we kind of knew that the Fed was keying on unemployment, but again we’re not all that happy to have it confirmed.

The story made the front pages of the Financial Times, the Wall Street Journal, and the New York Times, in all cases above the fold. So in the eyes of the mainstream—and especially the financial—media, this is a big deal. I agree, for a change. The Fed has explicitly moved toward supporting the real economy, in employment, and away from supporting the financial economy, with inflation. Clearly, it is worried more about the former than the latter.

Much of the coverage today is about the difficulties facing the fiscal cliff negotiations. These stories suggest that I may have been premature in thinking the Republicans had fought their own civil war to completion. Although the House Republicans did indeed offer a compromise plan, and the leadership did indeed sign on, the battle still seems to be under way.

[youtube=http://youtu.be/vCh_g-ag2ns?rel=0hd=1]

Apparently, Obama’s demand that the Republicans come up with a plan had some effect—they did. Not surprisingly, the offer includes much less new revenue than the White House proposal and much larger spending cuts. The New York Times has a pretty good graphic today on page A16 that compares the initial offers.

A few interesting points:

For the past couple of weeks, I have been writing about how I think, ultimately, we will not go over the fiscal cliff. I have based my views on the need for both parties—for their own good and for the good of the country—to actually compromise and solve the problem.

And the need for some sort of deal is increasingly apparent, as I believe, based on the facts at hand, that the damage done to the economy may be well in excess of the 4 percent of GDP that the actual tax increases and spending cuts amount to. About two-thirds of that 4 percent is made up of tax increases; the rest is spending cuts. Economic studies have shown that the multiplier for tax increases is between 2 and 3, while that of spending cuts is between 1 and 2. Combined, using a multiplier of 2.5 for the tax increases and 1.5 for the spending cuts, we might reasonably assume a 7-percent to 8-percent hit to GDP.

Sort of. The White House has made an initial fiscal cliff proposal, which the Republicans have rejected out of hand. The headlines are portraying the Republican dismissal of the proposal as a problem, but the markets seem to be taking it in stride. I suspect the markets are right on this one.

The fiscal cliff debate has shifted to some interesting ground. After a good start, with both sides sitting down and announcing that a deal was doable, there has been little visible action between the parties. There has, however, been quite a bit of activity within each party.

Today, President Obama and Speaker Boehner, along with their teams, will sit down at the White House to try and figure out how to solve this thing. Encouragingly, everyone seems to be shutting up.