The Fiscal Cliff – Where are we at?

No one ever said being President of the United States was an easy job, and that has certainly been the case for the newly re-elected, President Obama. After a bitterly fought re-election over Republican nominee, Fmr. Gov. Mitt Romney, he was literally back to work the next day, beginning the negotiating to avert the Fiscal Cliff.


As I wrote in my article for ESSA’s Equilibrium about this topic, the Fiscal Cliff will involve the expiration of numerous tax cuts, unemployment benefits and across-the-board discretionary spending cuts; a scenario many economists fear will significantly inhibit economic growth in 2013, the exact opposite of what the American economy needs as it slowly emerges out of a sluggish economy recovery and into a more sustained period of economic growth.

For both parties, there has been much posturing in the weeks since the election, as both Democrats and Republicans seek to stake out positions of bargaining strength as negotiations heat up and the Cliff gets closer by the day. Without a doubt, the solutions on offer to avert the Fiscal Cliff involve bitter pills to swallow for both parties.


For the Democrats, there will be significant cuts to discretionary spending and there will undoubtedly be reforms to the entitlement programs (particularly Medicare) that they cherish like their own children. However, there seems to be an emerging consensus about what the Democrats in Congress and the President will rule in and out when it comes to making a deal with Republicans, reflective of their improved bargaining position and confidence since the President’s re-election (whose margin of victory has continued to grow with the counting of absentee and provisional ballots since November 6).


With this in mind, and still reeling from their losses in the House and particularly the Senate (where they managed to lose two seats considered certain victories mere months ago), the Republicans are more divided on where they stand. In the weeks since the election, there have been some high profile Congressional Republicans who have broken with the established party orthodoxy to not raise taxes at all, thus violating the No New Taxes Pledge pioneered by lobbyist, Grover Norquist. The most high profile defector from the infamous pledge is Rep. Tom Cole who has suggested that Republicans swiftly pass legislation to preserve the Bush Tax Cuts for 98% of income earners whilst leaving those for the upper 2% of income earners at the mercy of future negotiations on taxes.


For years now the idea that Republicans would acquiesce to tax hikes proposed by Obama (who wants to raise taxes to the Clinton-era rates for income earners over $250,000 amongst other increases to rates on capital gains and estate taxes) was unlikely to say the least. But now the President has all the leverage: he can dare the Republicans to push the economy over the Fiscal Cliff (something the Congressional Budget Office suggesting would cause the American economy to contract during 2013 by 0.5% whilst pushing the unemployment rate up  to 9.1% from it’s August 2012 level of 8.3%) by standing up for Norquist’s pledge and lower taxes for high-income earners.


Whilst there has been much back and forth since the election between Obama and leading Congressional Republican, Speaker John Boehner, on the scope of the deal and the mix of spending cuts and tax hikes, there is an emerging consensus that an ultimate deal will be forged before the end of the new year that includes about a $1 trillion in tax hikes and equivalent spending cuts, although such cuts are still to be determined (as neither side wants to be the first to propose them to the public for fear of looking heartless with their cuts as Christmas approaches).


Ultimately though, what the US economy needs more than anything is stability in its policymaking. We need only to look at what happened last year when the polity nearly allowed the US to default on its credit and the effects it had on consumer and investor confidence.


Everyone knows that a deal needs to be made to avoid the Fiscal Cliff, but for once in Washington, the time has come for both sides to actually make some tough choices. And as the President seeks to begin carving out his political legacy, expect him to be the key player.


You can follow me on Twitter @CRJWeinberg.