Call it the sea-bass bubble: President Barack Obama takes 12 Republican senators out to dinner, and all of a sudden Washington has its hopes up for a big fiscal deal.
Don't bet on it. Obama and the Republicans both have political incentives to act like they are working hard on a deal to replace sequestration, provide fiscal policy certainty and maybe even reform the tax code. In fact, the odds of a permanent fiscal deal have gone way down in recent months because both sides have already gotten much of what they want, and there is an absence of any market pressure to do more. Without clear political or economic motivation for a deal, this attempt to find a grand bargain will fail, as previous ones did.
Obama's new outreach strategy comes because he needs to reframe the fiscal debate. The president routinely cites polling data that demonstrates public support for his proposal to balance deficit reduction between spending cuts and tax increases. But his personal approval ratings have taken a hit recently as he rolled out campaign-style events that promised doom and gloom in case of sequestration -- while doing little to prevent it.
So Obama is engaging Republicans and using a more hopeful tone in describing what Congress can accomplish, both of which will help burnish his image. Obama knows there are elements of his existing deficit-reduction proposals -- like the nearly $1 trillion in cuts he has put on the table -- that appeal to moderate Republicans. By taking his sales pitch directly to them, he hopes they will say positive things when his new budget is released later this month, which will make him look more serious on fiscal issues. To the extent this creates division among Republicans, that can only be to his advantage.
Republicans, meanwhile, are engaging with the president because they have nothing to lose. Some think the president is "suing for peace" -- that he thinks he's losing on fiscal policy and wants to give up more than before in order to strike a deal and move past budget politics. At the very least, it looks constructive for them to search for potential bipartisan cooperation.
There's no downside to talking, so we're seeing talks. But there is little appetite in the White House or on Capitol Hill to expend the political capital that would be necessary to bridge the gap between the Democratic and Republican positions on fiscal policy.
Obama has fewer incentives to do a big deal than he did last year. First, as the Congressional Budget Office's latest outlook makes clear, any fiscal crisis is far off: Why risk serious political capital to forestall a crisis that is not going to happen on your watch? Second, the president has already achieved much of the new revenue that he was seeking via last year's fiscal cliff deal, and he didn't have to give up anything in return for it. Third, Obama wants to pivot to social issues about which he is most passionate and where the public largely backs his position.
Finally, the politics of the 2014 election are not at all conducive to a bold trade-off: Democrats have an eye on winning the House by trying to rally their base, which would preclude deep entitlement cuts, while Senate Democrats from Republican states are themselves wary of backing additional tax increases.
Politics in the Republican House are no more conductive to a larger deal. Speaker John Boehner has sworn off the private budget negotiations that would enable a bigger bargain for his own political reasons. Many rank-and-file House members feel that too much revenue was given up in the fiscal cliff talks and have no appetite to give up any more. Most Republicans think sequestration hardwires the balance of oncoming deficit reduction in their favor: They don't like its blunt impact on discretionary spending, but it is a sufferable way to get spending cuts until an alternative can be put in place.
Lastly, Republicans know they cannot get the big policy changes they want while Democrats control two-thirds of the government. In fact, House Budget Committee Chairman Paul Ryan now talks about "delaying" a debt crisis rather than fixing the debt.
At a moment when political will is waning, the problems that are hardest to solve remain. Discretionary spending has already been capped and the wealthiest Americans have already seen an increase in their taxes. To materially fix Medicare or raise significant new revenue, big changes are needed that will necessarily cause pain to both parties' core supporters.
Congress rarely makes tough choices unless the alternative is far worse, and in this case the alternative is acceptable. If sequestration is left in place, the U.S. budget will reach primary balance in a couple of years -- and even if the automatic cuts are turned off, the deficit and debt will remain at sustainable levels for much of the rest of the decade.
Most important, there is no market pressure for a big fiscal deal. Equity markets remain strong, and 10-year Treasury rates are still around 2 percent. At some point, but probably not any time soon, the Treasury's interest-rate free lunch will be over, and rising borrowing costs will create pressure for further deficit reduction. Then both sides will dig in on finding real fiscal fixes. Until then, Congress will do what it does best: Make small deals and put off bigger choices until a later date.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.