The Inevitable Fiscal Cliff Deal Approaches

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By Sean West

A funny thing happened on the way to the fiscal cliff: Too many people forgot that elected leaders prefer to avoid injuring the public that votes for them and the businesses that bankroll their campaigns.

Over the last month, with signs of early progress scarce, the public, investors, commentators and even many Capitol Hill staffers grew skeptical that any deal to avert the fiscal cliff could be inked. It became conventional wisdom to assert that, rather than make tough political choices, the newly re-elected president and speaker of the House would end up tanking the economy with a toxic cocktail of immediate tax increases and automatic spending cuts in hopes of increasing their leverage over fiscal policy in 2013.

Now that negotiations have been unlocked by Speaker John Boehner’s offering of serious concessions on tax rates and the debt limit, it has become clearer that there is political will to avoid the fiscal cliff. This should not have come as a surprise.

Shortly after the election, I wrote in these pages that the fiscal cliff was a “self-denying prophecy”: It would be so damaging to companies and voters alike that both Boehner and Barack Obama would go out of their way to avoid it.

Yet, where it was once lamented that Congress was beholden to corporate interests, in the face of the fiscal cliff it was hard to convince anyone that Washington cared at all about how companies would be damaged by driving over the edge of the cliff. Apparently believing that Democrats and Republicans could agree to avoid a huge economic contraction of their own making is grounds for membership in a dwindling group of political observers called optimists.

Why should a fiscal cliff deal be so unbelievable? After all, the election should have clarified things: Both sides drew very distinct lines on fiscal policy in their campaigns, and one side won.

Investors and political observers have been scarred by two events that foster an overwhelming dark view of the extent of political risk emanating from Washington. And this instinct to expect the worst from Washington is compounded by omnipresent countdown clocks highlighting each day that goes by without public progress.

It all starts with the memory of the House failing to pass the 2008 TARP financial stabilization package on the first try. It requires only one surprise 800-point drop in the Dow Jones Industrial Average to never take another important congressional vote for granted. And then the debt limit debate of 2011 provided convincing evidence that politicians were willing to put ideology before common sense.

These two events validated concerns that officials in Washington cared too little about markets, downgrades and economic damage. And post-game reports of the 2011 negotiations provided a compelling storyline that Obama and Boehner were virtually incapable of negotiating with each other.

So the case for the fiscal cliff being the third in a series of tremendous political risk debacles was easy to write and disturbingly believable. Obama and Boehner can’t work together. The newly re-elected president would overreach. Democrats would refuse any entitlement cuts and secretly prefer to drive off the cliff so they could blame the Republicans. A Republican Party willing to risk default to keep taxes low would rather pass a tax cut after Jan. 1 than allow a tax increase before it.

Time would be short; heels would be dug in. Lawmakers would return home without a deal, content to retroactively fix damage next year. Businesses and taxpayers would be taken along for a ride over the cliff, and markets would hemorrhage value.

But the 2012 lame-duck session is neither 2008 nor 2011. The shock TARP vote was during a real crisis -- and there was actual uncertainty both about how to stem the bleeding and about who would even be president only weeks later. July 2011 was unique because Republicans had just been swept to power on the backs of dozens of Tea Party members who promised to fight this fight; leadership was unwilling to cross the Tea Party because it hoped to use their energy to win the White House and the Senate a year later.

In contrast, the fiscal cliff is a crisis of Congress’ own creation. And the fringes of both parties have been sufficiently neutered to allow the president and the speaker to ink a deal.

The 2012 election was fought over issues directly related to the fiscal cliff. It shouldn’t be surprising that the defeated party will ultimately be willing to give the victor enough spoils to complete a deal. Although the two parties are content to slowly dance their way to a deal as the deadline approaches, it seems clear now that they are highly likely to get there.

And both sides realize a deal is economically necessary. Republicans fear being blamed for an economic crisis that results from going over the cliff. And while some congressional Democrats believe it would be fine to go off the cliff "a little bit," striking a deal with panicky Republicans in January, that does not appear to be the administration's view. The White House wants a deal before January, and knows it can get most of what it wants out of Boehner before then.

Should Obama and Boehner fail to complete a deal, it will be because of miscalculation during the endgame, which is a risk in any negotiation; not because a fiscal cliff deal was actually a long shot. And, even then, a host of fallback plans to avert the economic shock everyone fears -- like simply extending the Bush tax cuts for families earning less than $250,000, waiving the sequester and going home -- are ready just in case.

(Sean West is U.S. practice head and director at Eurasia Group, a global political risk advisory firm. You can follow him on Twitter at @seanpwest.)

-0- Dec/17/2012 21:38 GMT