Washington INsider

Washington INsiderblog

Mark Schoeff Jr. looks at what's really happening on Capitol Hill - and the upshot for advisers.

Should Congress plunge off fiscal cliff?

Expert says it might be best way to shatter ossified political positions

Sep 24, 2012 @ 3:10 pm

By Mark Schoeff Jr.

Now that Congress has gone into recess until after the election, the next stop is the fiscal cliff.

Just before leaving town, members of the Senate Finance Committee met behind-closed-doors for talks with administration officials about the expiration of Bush-administration tax cuts and the mandatory $1.2 trillion in spending cuts over 10 years that will be go into effect on Jan. 1 unless an agreement can be reached.

Opening the lines of communication early shows that lawmakers are concerned about the potential ramifications of hurtling over the fiscal cliff.

But one expert asserts that is exactly what should happen to break the ossified party positions on each side. Republicans stridently oppose tax increases, while Democrats fiercely defend against entitlement cuts.

“This is such a politically charged issue,” Douglas Elliott, an economic fellow at the Brookings Institution, said at a Sept. 19 forum sponsored by the Center for Audit Quality. “We may have to go off the damn cliff.”

He acknowledged that in doing so, investor confidence may be “shattered.” But in the long run, it would be worth it.

“That may be what we have to do to get to a situation where we can rebuild,” Mr. Elliott said.

The biggest challenge, he said, is to get Republicans to give some ground regarding tax increases.

“Of the hardened positions on both sides, that's the most hardened,” he said.

Later in the program, he was challenged by a member of the audience who said that in voting for GOP vice presidential nominee Paul Ryan's budget in the House, Republicans have at least indicated a willingness to tackle entitlement reform. Mr. Ryan, R-Wisc., is the chairman of the House Budget Committee.

“Both sides need to show greater courage,” Mr. Elliott said. “Both sides need to have greater clarity.”

But he stuck to his guns that the sticking point is Republicans.

“Democrats seem to have more willingness to support spending cuts,” he said.

The best thing for clarity would be a decisive vote in November. Instead, it is likely will be a status quo election, with President Barack Obama staying in the White House, Democrats maintaining control of the Senate and Republicans retaining their House majority.

That's a formula for a continuation of pitched political battles that are eroding investor patience.

“I don't see a lot of leaders in the political world,” David Gardner, co-founder of the investment advice website Motley Fool, said at the forum. “Both parties [have] more similarities than differences. It doesn't affect my investment approach.”

It sounds as if Mr. Gardner has given up on Washington while Mr. Elliott prescribes painful medicine to begin the bipartisan healing. The brittle politics of Washington supports each of their pessimistic positions.

But the one thing that's even more powerful than political inertia in Washington is political self interest. That may be the saving grace for the fiscal cliff.

So far, it's not clear that either side achieves a clear victory in a plunge over the fiscal cliff. If they're both going to get smashed in the fall, it's best for neither to step over the edge.

In Washington, that's what has to pass for optimism.

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