Will a Deal to Avoid the Fiscal Cliff be Reached this Year?

There probably isn’t enough time to get a firm deal in hand to avoid sequestration on January 1, 2013, but some scary predictions from the CBO and the stock market swoon this past week seems to have convinced both Republicans and Democrats that they must move with more urgency toward reaching an agreement.

Wall Street Journal:

Warnings from the CBO and private-sector economists, as well as a couple of rocky days in the stock market this week, have pushed politicians to at least sound more willing to compromise on their differences than in the past. The Dow Jones Industrial Average fell 2.4%.

“We’ve already had half of a lost decade,” David Stockton, a former top Fed economist now at the Peterson Institute for International Economics, said of the U.S. economy Thursday. “I think going over the fiscal cliff in this manner would be sure to bake in at least a lost decade and probably then some.”

Since Mr. Obama’s election victory, White House and congressional leaders of both parties have taken a more conciliatory stance. That has stirred hopes of a bipartisan deficit-reduction deal among some—and agitated people in both parties who object to any compromise calling for higher tax revenues on one hand, and cuts to government entitlement programs on the other.

“Personally, I think the conditions are exactly perfect for us to move ahead with this right now,” said Sen. Bob Corker (R., Tenn.), who won re-election Tuesday. “It is going to take the president being committed to doing this and sitting down and rolling up his sleeves and making it happen.”

House Speaker John Boehner of Ohio in a conference call Wednesday told fellow Republicans to avoid drawing lines in the sand. “We don’t want to box ourselves in, and we don’t want to box the White House out,” he said, according to someone familiar with the call.

So far, so good. Relations have gone from icy to chilly — from arctic conditions to sweater weather.

But it’s going to take more positive signals from President Obama that he is going to stand up to the Democrats in Congress who don’t want to reform entitlements at all before Boehner starts talking turkey about “increased revenues” — whatever that means.

And frankly, the goals the president has set are far too modest to have much effect on the deficit:

The White House is looking for a formula that would stabilize the government’s debt as a share of the economy to around 75%, according to one person familiar with the matter. Before the 2007-09 recession, the debt-to-GDP ratio was below 65%.

Offering a framework rather than a detailed proposal could be attractive to the White House because of concerns that Republicans might reject a plan with too many details.

The White House also was trying to decide whether any offer should include deficit-cutting proposals that Democrats might find unappealing, such as changes to Medicare and Social Security.

If the president wants to talk mandate, perhaps he should remember that despite all his jawboning against the Republican House, the voters decided to return most GOP members to Congress. And GOP candidates made no secret whatsoever of what their priorities were in the coming session; cut the deficit and work toward reducing our $16 trillion national debt.

In that sense, the GOP House has as much of a legitimate mandate as Obama can claim.

But talk of mandates is stupid. The voters want jobs, they want a reduction in the deficit, and they want the government to get its act together in order to avoid the fiscal cliff. The CBO isn’t kidding when they say that failure to avoid catastrophe would result in another recession:

The CBO on Thursday detailed its view that if Washington policy makers don’t act before the end of the year, the economy would contract by 0.5% in 2013. The unemployment rate would jump from 7.9% to 9.1% by the end of 2013, according to the CBO—a nonpartisan arm of Congress.

If all the spending cuts and tax increases are avoided, CBO forecast the U.S. economy would grow by about 1.7% next year.

Former Reagan era OMB director David Stockman said “We’ve already had half of a lost decade… I think going over the fiscal cliff in this manner would be sure to bake in at least a lost decade and probably then some.”

Hashing out the details so that the new Congress is ready to deal with the fiscal cliff immediately upon being sworn in early January would appear to be doable. But Obama is going to have to show more backbone with members of his own party and Boehner will have to show flexibility without losing the majority of his caucus in the House before we can breathe a sigh of relief and get to work on serious budget and debt negotiations.