US Elections Analysis: The "Fiscal Cliff" and the Races for the New Congress
Sunday, October 21, 2012 at 17:43A Democratic ad criticises Minnesota Republican Chip Cravaack for his opposition to President Obama's health care plan
The first two debates between President Obama and Mitt Romney have been political theatre at its most dramatic –-- whether a comedy or a tragedy depends on the audience you ask --- but their dominance of the headline has obscured an answer to the most important question of this election year.
Will the next President, whoever he is, be able to work with the newly-elected Congress and find a legislative solution to the problems he will face immediately upon taking office?
The “fiscal cliff”, and America's headlong rush over it, approaches; however, amidst the daily controversies over funding for Big Bird and Mitt Romney's “binders full of women”, neither candidate has addressed how he will work with a partisan Congress to avoid the scheduled tax rises and spending cuts that will not only plunge the American economy into another recession but exacerbate the economic slowdown around the globe.
And this is just the initial crisis that the new President will face. The scale of America's annual deficits and total debt must be addressed --- with some kind of long-term plan that can pass Congress --= otherwise, other rating agencies may join Standard and Poors in downgrading the country's credit rating. Last month Moody's released a statement, "Budget negotiations during the 2013 Congressional legislative session will likely determine the direction of the US government’s AAA rating and negative outlook."
Fitch Ratings, the third of the three leading agencies also has the United States on a negative outlook, declaring as early as November 2011, "Failure to reach agreement in 2013 on a credible deficit reduction plan ...would likely result in a downgrade of the U.S. sovereign rating.”
After the first downgrading of America's credit rating last year, interest rates on government bonds actually fell, and many economists and investors regard the opinion of the ratings agencies as irrelevant. However, as New York Magazine reported:
The problem is, most large investors use a "two out of three" approach when evaluating which securities to hold or dump. In many contracts, the relevant rating is the one agreed upon by two of the S&P/Fitch/Moody's trio. So, if either Fitch or Moody's joins S&P in downgrading U.S. debt, that could trigger raised interest rates or, for some major investors, the mandatory sale of American debt. When most of these financial contracts were written, treasuries were considered essentially foolproof. A two-out-of-three rating downgrade could trigger some unintended and unsavory effects on bond spreads. Right now, as deficits expand, we need as many investors clamoring for our debt as possible — or we risk paying more and more taxes in servicing it.
Given the even worse credit ratings of countries around the world, even a “two out of three” downgrade of the US might not be catastrophic. America would still be seen as a safe-haven for investors looking to park their money. But when you enter unknown territory, there is always a risk of unintended and unsavoury effects.
Bi-partisan grounds for reaching such an agreement appear impossible in the current political climate. A Congress split between the two parties is the obvious barrier to a compromise on spending, taxes, and the future of health care, but the rancour this particular election is generating will also have its consequences.
Negative ads have abounded this election/ That is especially notable at the Presidential level, but the impact is also in the Congressional races, where a recent Democratic campaign against some Republican incumbents in the House of Representatives offers a prime example.
In the new health care law, a.k.a. Obamacare, there is a provision that members of Congress will no longer be a part of the taxpayer-subsidised Federal Employees Health Benefits Program. Instead, like other citizens, they will have to get their insurance through the exchanges set up by the law. So when they voted to repeal Obamacare, Republicans in the House of Representatives were also making a personal decision to remain in the taxpayer-funded system. At least that is the charge the Democratic Congressional Campaign Committee, and a Democratic Super PAC, are levelling on the campaign trail.
This will be the backdrop when lawmakers convene after the election, initially in a lame-duck session when current members of Congress see out their terms, whatever the result in their races in November. If the recent comments of the House and Senate Majority Leaders are any indication, little will be achieved in that short period, other than the prevention of a government shutdown if the debt limit is reached before the end of the year.
SO a new Congress will not have time to find its feet before it begins debate on weighty issues –-- and you can forget about a President Romney getting the usual “100-day” honeymoon period.
That is especially likely because the next Congress will be divided along the present lines. The Republicans will remain in control of the House of Representatives. Their current majority of 241-194 may suffer slightly, but there is little chance of Democrats dragging the Republican advantage down to even the single-digit mark.
Of course, a Republican House severely hurts the chances of an Obama Presidency securing reforms, but a strong GOP majority also provides concerns for Mitt Romney if he wins. The Tea Party's conservative influence is centred in the House, and they will not easily bend to requests from a President, even one from their own party, to enact policies which they consider ideologically unsound.
But President Romney, to make any progress, will have to pursue legislation aimed more to the centre ground than the House would want because the Senate is likely to retain a Democratic majority. The outcome of the battle to control the upper chamber is not as clear cut as that of the House, but barring a collapse in Democratic support, they will hold onto a slender majority. That majority, even if it is 51-49, is important because it can overcome a filibuster on repeal of the central part of the new health care law. It can also prevent the nomination of any Supreme Court Justice whom they believed is too closely allied with the conservative social policies of the Republican Party.
Quite how the partisan atmosphere in Washington can be changed is a quandary, but the answer needs to be found soon. America can recover from plunging over the “fiscal cliff” and probably weather even the worst effects of a “two out of three approach” credit downgrade, but one has to wonder how many hits the US economy can take from its own government's inaction before prosperity is a notion of the past rather than of the future.
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