The political landscape following the election on November 6 has subtly changed, with both Republicans and Democrats seeing an advantage to at least pretending to want to avoid the massive tax increases and spending cuts that would automatically kick in on January 1, 2013, unless a deal to avoid the “fiscal cliff” is reached before then.
GOP leaders Speaker Boehner and Senate Minority Leader McConnell have promised that “revenue will be on the table,” while Senate Majority Leader Harry Reid told reporters: “We have the cornerstones of being able to work something out.”
How sincere are they? The GOP position on holding the line on taxes has weakened with the re-election of President Obama and the Democrats’ surprising showing in Senate races across the country. But Republicans can point to a good outcome in the House that currently shows them losing only six seats. With no mandate apparent for either side, it is in both parties’ interest to look for a way to avoid calamity.
While the negotiations to avoid sequestration will take place in a lame duck congress, the issue is already shaping Senate and House races for 2014. At the top of concerns for both parties is the desire to avoid looking like obstructionists in getting a deal done. The consequences of failure — a probable uptick in unemployment and another recession — mean that the potential that one side or the other will be blamed for the downturn will probably drive both sides to compromise enough to reach some kind of an agreement before the end of the year.
No one wants to be the last man standing when the music stops and the mad dash for the last empty chair ensues.
The trick will be to compromise without appearing to compromise. Reuters lists some of the possible outcomes:
Obama says tax rates on the wealthiest 2 percent of Americans must rise, while Republicans say they will not agree to any rate increase.
Republicans are also eager to rein in government health costs, which are projected to explode over the coming decade.
“We’re prepared to put revenue on the table provided we fix the real problem,” McConnell said, referring to Medicare and other government benefit programs.
There could be room for compromise.
Obama could agree to allow the top tax rate to rise to something less than the 39.6 percent he wants. Policymakers, for example, could also agree to limit the tax increase to households making more than $500,000 annually, rather than the $250,000 cap Obama is demanding.
Republicans have suggested generating more revenue by limiting tax breaks for the wealthiest, rather than raising their rates. Obama has said that would not raise enough money.
While the government may have a little flexibility in softening the full impact of the budget cuts, Treasury Secretary Timothy Geithner told Bloomberg TV on Friday the Treasury Department did not have the authority to delay the tax increases that would take effect at the start of next year if the White House and Congress fail to reach a deal.
Business leaders say the uncertainty is already weighing on the economy as employers postpone hiring and capital expenditures until they get a better sense of the tax and spending environment.
Pelosi suggested two sides might forge a temporary deal that would get them past the fiscal cliff and give them more time to work out a more lasting solution. Lawmakers will almost certainly not have time to retool Medicare and overhaul the outdated tax code before the end of the year, but a preliminary agreement could provide a framework for doing so later.
“The speaker spoke about a framework going into next year. I was focusing on how we send a message of competence to consumers, to the markets, in the short run, too.” Pelosi said.
The problem with a temporary deal is that with the Sword of Damocles no longer poised above their heads, there would be little impetus for Congress to reform the tax code, deal with entitlements, or make further cuts in discretionary spending in order to get our fiscal house in order. The notion that an interim agreement would automatically lead to a “Grand Bargain” on taxes, spending, and entitlements is nonsense. Democrats are under enormous pressure not to cut a dime from Medicare or Social Security while Republicans are feeling the heat on giving up too much on the revenue side of the ledger. This is a recipe for gridlock, not compromise. We would be back exactly where we were for most of the last year: stalemate, name calling, and paralysis.
Some on both sides are calling for the Kool-Aid option: voluntarily jumping off the fiscal cliff. Some conservatives think that this is the only way to significantly cut the budget even if it will result in tax increases, while some liberals are licking their lips at the probability that the GOP would be blamed for the fiasco even though there would be significant cuts to Medicare. Neither side is being taken seriously by the party leadership on the Hill, although that doesn’t necessarily make coming to an agreement any easier.
You don’t have to be a betting man to wager that the two sides will probably make a deal at the absolute last minute. Nor does one have to be a soothsayer to predict that the probable reaction to a compromise on both sides will be the complaint that their guys “caved in” to the other side. In the end, an agreement that neither side will find palatable or support with much enthusiasm will be reached. Then, Democrats and Republicans can go back to business as usual: inventing new ways to spend money we don’t have on things we probably don’t need.