The Fiscal Cliff: A Hard Landing Becomes More Likely

There is hardly an optimist so bold as to predict that the Congress and the President can make any real progress on our fiscal problems before the election. Both parties and all candidates in the 2012 elections are in their full campaign modes now.

Campaign promises, not compromise solutions, will dominate the political scene until November. But what happens then? One idea is that the branches and parties will reach some miraculous accommodation in the lame-duck Session that will prevent our economy from falling off what Chairman Bernanke has called the "fiscal cliff."

Unfortunately, that notion is as unlikely as it is popular. The dimensions of the cliff are enormous. It is composed of many diverse elements. Policymakers well-accustomed to discussion, negotiation and compromise would find them daunting in a normal, full Session. Currently the process is mired in distrust, animosity, and ideological warfare.

In the short lame-duck Session, the environment could hardly be worse for solving the complicated fiscal problems by compromise. Except for spending bills, like the Transportation Act, compromise has become a lost art. Well defined, highly divisive positions that have defied serious negotiation for 2 years are unlikely to be moved substantially in a month.

It has become increasingly apparent that not all, nor even the major pieces, of the fiscal puzzle can, or will, be fitted together between election day and New Year's Eve. The people, the rating services, the markets and our creditors may wish for the magic solution, but our system, now in a full-scale shooting war, is probably not going to be able to deliver the full package.

One possible approach might involve a partial solution, with a heavy down payment on the deficit, temporary extensions of the thorniest issues, and meaningful promises of future debt stabilization backed by believable enforcement provisions. That's a package that will not be much easier to work out than the Grand Bargain itself.

First, all the elements that make up the cliff have to be subdivided and examined carefully. Some, like the FY14 Continuing Resolution, have proved easier to compromise in the past and may be expected to be again. The debt ceiling, a critical piece, will have to be resolved in any solution. If not, we fall off the cliff. The Sequester may have to be partially abandoned, but, even if the military cuts are deemed excessive, some of them must be made, and the rest, sooner or later, have to be paid for in other ways. No debt stabilization exercise can be credible if promises made are not, eventually, promises kept.

Some items, certain to considered again in Tax Reform efforts in the following Session, like AMT, the Doc Fix, the Bush Tax Cuts, could be negotiated, but probably won't. They may require short term, temporary extensions, preferably with down payments. Short term can-kicking is preferable to ignoring the can. Small stuff, like the Extenders, could be finished this year, either by being paid for, or by expiration.

Tax reform, an exercise of 2 full Sessions when last achieved in 1986, will have to be pushed into the 1st Session of the next Congress. It may embrace all of the tax issues temporarily resolved, or extended, in the lame-duck Session.

Because entitlements and taxes are so dear to the parties, they will probably have to be done in tandem. Excepting possible down payments, next year may have to be soon enough for them, too. In addition to political differences, they are probably too complicated for quick decisions. Nevertheless, whatever is agreed to in the lame-duck Session, to be a credible plan to stabilize the debt, will require a long-term goals, short- and mid-term targets, significant down payments and credible enforcement mechanisms.

Based on the record, no plan, simple or complex, carries favorable odds for success. After the all-out election wars, the warring parties will need to lower their voices, reduce their aspirations and sweeten up their attitudes. The election may help them to understand that the electorate is not going to give either one of them single-party control of government.

They have proved that they can compromise "up" in spending bills. Now they have to learn to compromise "down." For the two parties it's a Hobson's choice. Each side is protecting valuable, traditional territory. For Republicans, it's no new taxes and growth for the economy. For Democrats, it is no entitlement cuts and a more compassionate government.

Only the factions themselves can decide what, when and where to yield, but yield they must. If not, they doom us and our progeny to unsustainable debt loads and declining income. It's a long, painful way down to the bottom of that cliff. When we fall, we may not hit bottom immediately, but we will hit it eventually.