5 Ways The ‘Fiscal Cliff’ Will Or Won’t Be Resolved

5 Ways The ‘Fiscal Cliff’ Will Or Won’t Be Resolved

Before President Obama left town on the Friday before Christmas, he urged members of Congress to sip some eggnog and relax over the holiday. Speaker Boehner might be in need of some liquid courage after a disastrous attempt to pass to avert the “Fiscal Cliff” with what he called “Plan B” went down in flames after right-wing groups like FreedomWorks and the Club for Growth nixed his plan.

As negotiations resume Wednesday to avert a series of automatic spending cuts and tax breaks expiring, Bill McBride of Calculated Riskadds some much-needed perspective to a situation that was created by a Republican Party commitment to the completely contrary goals of reducing the deficit and never, ever raising taxes:

A few obvious points on the “fiscal cliff”: 1) It is about the deficit shrinking too quickly next year, 2) there is no “drop dead” date and an agreement in early January still seems likely (the sites and TV stations with countdown times are embarrassing themselves), and 3) entitlements are not part of the “cliff” (although it was possible some changes might be part of an agreement).

While the sequestration President Obama and Speaker Boehner agreed on in 2011 to avert the manufactured debt limit crisis will include $11 billion in Medicare cuts along with billions in defense and other cuts, it would not change any benefits that beneficiaries of the program receive. But there’s no doubt that if the whole of cuts and tax breaks ending in the fiscal cliff are allowed to come into being — cutting the deficit in half — they would eventually damage our already-shaky economy, despite the fact that right-wingers have been claiming for years that the deficit was to blame for our slow recovery. And if Republicans want to hold the debt limit — which expires early in 2011 — hostage again, a fiscal crisis could be inevitable.

So something has to be done. But what? Here are five possible resolutions to this completely unnecessary drama:

1. The snooze bar.
Unable to resolve anything but unwilling to take the heat of the markets punishing inaction, Congress passes a bill that simply delays the sequestration, continues all the Bush tax cuts and raises the debt limit for around three months. Then the president signs it. This would be a huge win in general for Republicans who are desperate to avoid the president going into his inauguration and State of the Union prepared to lambast the GOP for refusing to compromise. They would love to delay a deal and hope the goodwill the president won with his re-election fades.

2. The president’s “small deal.”
On Friday, President Obama said, “Now’s not the time for more self-inflicted wounds, certainly not those coming from Washington.” He seemed to be proposing a much smaller deal than the “Grand Bargain” that he and Speaker Boehner have been unable to achieve. This deal would likely include extending the Bush tax cuts for 98 percent of Americans, extending unemployment benefits and delaying the sequestration. This would be a huge win for the president because it’s his idea and it would mean the GOP would have agreed to allow a vote on something that actually ends tax breaks for the rich. This plan would still leave the debt limit to be resolved, which would likely lead to a package of cuts resembling what the president proposed before Speaker Boehner called for his “Plan B.” Or the president could invoke the 14th amendment and dare the GOP to take him to court. Or the president may even avert the debt limit debate by minting a trillion-dollar coin. Seriously. It could happen.

3. A mix of “Plan B” and the “small deal.”
In order to get Republicans to vote on a bill that raises some taxes, President Obama may agree to adapt his small deal to extend the Bush tax cuts for incomes up to $400,000 or maybe even $500,000. This would disappoint liberals but would still represent a miracle in that Speaker Boehner will have allowed a vote on raising taxes. Some agreement to reform taxes in 2013 along with another sequestration would likely be a part of this deal, along with a short-term raising of the debt limit. This is the deal that would likely make Wall Street the happiest, as it indicates that some compromise is possible.

4. Off the cliff, for a bit.
This is the outcome that seems most likely — we’ll head into January with no deal. And most of America won’t notice unless the stock market begins to crash. If the polls stay as they are now and Republicans are blamed for our diving fortunes, the GOP might be willing to then cut a deal that would technically involve only passing a tax cut, as all the Bush tax breaks will have expired. Thus Republicans will be voting for the Obama tax cuts. Whether the deal would include raising the debt limit along with plans for future cuts and tax reform is unclear — but the Republicans will likely need some concession or promise of future concession to save face.

5. Completely off the cliff.
If we get into January and Speaker Boehner recognizes that he cannot keep his job if he offers any kind of deal, it’s possible we could see no deal to resolve the cliff and possibly even a default with the House GOP refusing to raise the debt limit. If this happened, expect a financial crisis that’s at least as bad as 2008. Except in this case, it will have been a crisis created by a House majority that did not even win a majority of the votes cast in the last election.

Photo credit: AP Photo/J. Scott Applewhite


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