October 19, 2012

The Fiscal “Bluff?”

Keith Smith

The President wants it. House Speaker John Boehner and Senate Minority Leader Mitch McConnell want it. Businesses want it. The makings of a grand budget compromise are on the table. Principal negotiations have begun in earnest. Everyone seems to want to avoid the looming “Fiscal Cliff.”

The sheer size of the issues that simultaneously combine to form the “fiscal cliff” are staggering. Sequestration, tax increases on every American, and now the need to possibly raise the debt limit must all be addressed. And a status quo election produced a political dynamic in Washington that is unchanged and has a dismal track record of achieving success. Frankly, given these factors, it would be easy to predict that a paralyzed Congress without sufficient leadership from the President will yield no deal. Despite all this, I believe that something – even a minimalist deal that avoids the cliff and sets the framework to achieve a grand bargain – is likely.

The President, Senate Democrats and House Republicans have all staked out their traditional turf on the big issues. However, Republicans recently have said that increased revenues (if not rates) are on the table as long as permanent reforms are offered to the entitlement programs. It is possible that a slim majority of Republicans will agree to increased revenues – whether it is from eliminating or decreasing deductions or higher tax rates on upper incomes – if real spending cuts and permanent entitlement reforms are negotiated.

But given the magnitude of the issues and the short time frame, how is it possible for the fiscal cliff to turn into the fiscal bluff? Here’s how: while neither Congress nor the President has had the political will to fix this mess after several crescendos in the past few years, no one has the resolve to let chaos rule as tax rates increase and across the board budget cuts hit our anemic economic recovery.

If a deal is to be reached, here are three real reasons why:

1. President Obama believes he now has the upper hand publically and politically on the issue of increasing taxes on the “wealthy.” He wants to get the issues of entitlement reform, tax rates, sequestration and debt limit off the table because he wants the recovery of the U.S. economy to be on a stronger footing. He also wants his legacy issues – health care, immigration reform and energy security – to be what Congress works on for the next two years.

2. The 20 Democratic Senators (and the 13 Republicans including Republican Leader McConnell) who are up for re-election in 2014, all want the fiscal cliff issue off the table as soon as possible. The President and Congress will want to vote – once – for a long-term growth and deficit reduction plan that the markets will react positively to and that will give consumers confidence.

3. “I don’t care at this point whether you raise my taxes. I just want certainty. I want to make planning decisions for my business and the uncertainty is overwhelming my abilities now.” That comment was uttered recently during a small business CEO fly-in. The economic data stream may currently be looking a bit brighter (thanks to improved unemployment rates and housing numbers), but U.S. businesses, big and small, are waiting on the tax picture to become clearer. They are waiting to invest and waiting on U.S. consumers to start spending. The tax and economic uncertainty is killing business opportunity, just ask them. Finally, the U.S. is hoping that the Asian and European market downturns are not contagious. All of these factors have led numerous economists to forecast slow U.S. growth for late 2012 and 2013.

As I noted, negotiations have begun in earnest. The documented economic damage and the voter backlash that would result from failure to act, suggest that Congress and the President must find the political will to avoid going over the fiscal cliff. I believe that they will do so.