Congress returns on Tuesday to an economic cliffhanger—there are just 16 scheduled workdays in the lame duck session to forestall a potential recession next year.
This leaves lawmakers with precious little time to resolve budget issues that have split Democrats and Republicans for the better part of a decade. If the 112th Congress fails to mitigate the impact of $600 billion worth oftax hikes and spending cuts, the economy will plunge into another stiff downturn for the first six months of 2013, according to the Congressional Budget Office.
Lawmakers end the year with a sobering responsibility, yet are dubious about successfully arriving at a bargain that the Republican-majority House, the Democratic Senate, and the newly reelected President Obama endorse. The elections this month largely maintained the leadership that created the so-called fiscal cliff.
“That those who built the cliff are now charged with scaling it leaves us nervous about the possibility for a quick and mostly benign resolution,” Michael Hanson and Ethan Harris, economists for Bank of America Merrill Lynch, said in a note last week.
Kevin Logan, chief U.S. economist at the bank HSBC, says he anticipates that “substantive negotiations will simply be postponed until the new Congress takes office in January. That will leave a fog of uncertainty over the outlook for fiscal policy and may lead to increases in financial market volatility.”
What Wall Street and much of the country are waiting for are signs that discussions between the White House and Capitol Hill will somehow be different this time. Obama and Republican House Speaker John Boehner gave every appearance last week of two powerful leaders grimly determined to break two years of political gridlock in Washington and hammer out a framework for long-term deficit reduction and entitlement and tax reform. If they succeed, the country—and for that matter the world—will finally exhale as the U.S averts a year-end catastrophe of massive, automatic tax increases and defense and domestic spending cuts that could seriously undercut the economic recovery.
FIRST, YOU DANCE AROUND THE RING
That looming fiscal cliff was not a coincidence of the calendar, but the consequence of previous sparring and desperate compromises about economic growth and deficit reduction by the likes of Obama, Boehner , House Majority Leader Eric Cantor, R-Va., and Senate Majority Leader Harry Reid, D-Nev.
Both sides are determined to use what bargaining chips they have to maximize their leverage.
The Democrats know that without any action the tax cuts first introduced under George W. Bush are slated to expire next year. The $205 billion tax increase for the entire county could be avoided if Republicans would agree in the next few weeks to continue the Bush-era rates for the 98 percent of the country that earns less than $250,000 a year.
“Right now, if Congress fails to come to an agreement on an overall deficit reduction package by the end of the year, everybody’s taxes will automatically go up on Jan. 1,” Obama said in a White House speech Friday. “That makes no sense. It would be bad for the economy and would hit families already struggling to make ends meet.”
Republicans counter that the $50 billion-plus tax increase being supported by Obama would hurt small businesses and stifle economic growth, especially since the increase comes on top of planned state and local increases like those passed in California, that raise taxes on high-income earners by more than 10 percent.
They also argue that it’s more a political—not fiscal—to tax the rich in light of the income gap and protests from Occupy Wall Street. The most the country would gain from the effort would be $42 billion in 2012—not enough to resolve the tax cuts on domestic programs or defense let alone reduce the deficit. But Republicans have their own bargaining chip—the need to increase the government’s more than $16 trillion borrowing limit in February.
Over the weekend, Republican and Democratic lawmakers offered varying degrees of optimism that an agreement could be reached before the end of the year to avert the fiscal cliff, including measures to meet Obama's demand that wealthier Americans pay more in revenues. However, Republicans stressed that it would have to be achieved through closing tax loopholes and "broadening the tax base," and not raising tax rates on high-income earners.
"It doesn't make any sense to us to raise taxes on job creators at this time of economic challenge," said Rep. Tom Price, R-Georgia, on Fox News Sunday. "The equation is revenue, and spending. And, we can increase revenue without increasing the tax rates on anybody in this country, we can lower the rates, broaden the base, close the loopholes . . . And put in place pro-growth policies in energy and health care and the regulatory policy and address the spending. The spending that has to be addressed is Medicare, Medicaid and Social Security.
Rep. Chris Van Hollen of Maryland, the ranking Democrat on the House Budget Committee, said on the same program that the "tone" of House Speaker John Boehner's offer to include new revenues in any deficit reduction deal was encouraging, but that "the jury is still out" on what he was actually offering. "Others may be able to clarify, but he said something in a very artful way, which different people heard differently."
Sen. Patty Murray, D-Wash., sounded a warning that the Democrats might be willing to risk going over the cliff by allowing the Bush era tax cuts to expire at the end of the year if the Republicans fail to make concession on taxes.
"So if the Republicans will not agree with that, we will reach a point at the end of this year where all the tax cuts expire and we'll start over next year," she said on ABC's ‘This Week.’
"And whatever we do will be a tax cut for whatever package we put together. That may be the way to get past this."
DEBT CEILING REDUX
The debt ceiling debate last year took the government to the brink of default. When the dust settled, lawmakers agreed to raise the borrowing limit in return for $1 trillion in reduced spending over the next decade and other $1.5 trillion yet-to-be-identified cuts by a super committee. When that bipartisan committee failed in late 2011, the country was on a course to automatically slash defense and domestic programs by $110 billion in 2013—which also makes up the fiscal cliff.
At a Friday news conference, Boehner hinted that he might again rely on the threat of default to get his way on the fiscal cliff. “It’s an issue that’s going to have to be addressed – sooner rather than later,” the Ohio congressman said. But the last big battle over the debt ceiling sorely undercut public confidence in the Congress, and led to the humiliating spectacle of the Standard & Poor’s rating agency downgrading U.S. bonds – an event no one on Capitol Hill or at the White House say they want to see repeated this year.
Also hanging in the balance are another $375 billion worth of budgetary housekeeping that gridlocked lawmakers failed to take care of earlier. Some economists downplay the cliff as a mere slope that will be resolved, but that only happens if Congress manages to get its act together.
Boehner minimized the difficulty of navigating any compromise through the House—which after the 2010 election took a more conservative bent on government spending and taxation with the emergence of the Tea Party as a political force. “When the president and I have been able to come to an agreement, there has been no problem in getting it passed in the House,” Boehner told reporters on Friday.
But Boehner has in fact struggled to sell almost every negotiation with the White House to his most conservative members. Even when the two sides finally agreed on a plan to cut the deficit and raise the national debt ceiling, Boehner initially had to pull the bill from the floor late in the evening of July 28, 2011 when it became obvious that Republican members were not going to put him over the top. After some fine-tuning of the bill and more arm-twisting, the Speaker finally won passage.
As the two sides gear up for negotiations this week, congressional leaders will have to contend with a group of skeptical rank and file House Republicans who don’t consider Tuesday’s election as a reason to retreat on taxes. Tea Party firebrands such as Rep. Joe Walsh, R-Ill., were driven out of the 113th Congress, but the zealous opposition to taxes continues among Republican lawmakers for the moment and foreseeable future.
“The president may think that he’s got a mandate, but so do we,” Rep. Jason Chaffetz, R-Utah, told the Washington Post last week.” The president may have won a second term, but I won a third term.”