"The Democrats now look like the natural party of government," the Nobel Prize-winning economist wrote in a New York Times blog post on Sunday. "We're a diverse nation, ethnically and otherwise, in which a lot of liberal ideas have become perfectly mainstream."
But, he added, Democrats could waste this opportunity by caving to the Republican agenda in negotiations with Congress.
"This newly effective coalition could be shattered if taken for granted," Krugman wrote. "If, say, Obama raises the retirement age in return for vague promises on revenue (promises that would be betrayed at the first opportunity); if he appoints a deficit scold to a major economic post; it could all fall apart."
The fiscal cliff will be the first major post-election test of whether President Barack Obama will stand firm or cave. The fiscal cliff is a set of $1.2 trillion in spending cuts and tax hikes that are scheduled to take place on Jan. 1 if Congress does not agree on a plan to reduce the deficit. It is likely to cause a recession, according to economists.
Congressional Republicans are trying to reach a deficit reduction deal to avert the fiscal cliff with mostly spending cuts and little new tax revenue. Unlike Obama, they don't want to let the Bush tax cuts on income above $250,000 expire. Krugman wrote in a New York Times column on Friday that Obama should go over the fiscal cliff if necessary to get his way.
But Obama may already be giving in. He is proposing a deficit reduction deal that would cut $3 in spending for every $1 in new tax revenue. These spending cuts are likely to hit the poor, middle class, and elderly.