Lawmakers Head Back to Work With Fiscal Cliff Looming

El-Erian, Lieber of Washington Analysis weigh in on proper course to avert automatic cuts on Jan. 1

PIMCO CEO Mohamed El-Erian (Photo: AP) PIMCO CEO Mohamed El-Erian (Photo: AP)

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As lawmakers get back to work this week since breaking for their monthlong recess until Election Day, striking a deal on the fiscal cliff will be on the top of their minds.

Lawmakers, economic gurus and political pundits are voicing their optimism that some type of solution can be reached. As PIMCO CEO Mohamed El-Erian told “Bloomberg Surveillance” on Friday: “No one in their right mind would push our country into recession.” El-Erian said that “the major issue for us is not that we resolve the fiscal cliff but do we do it in a way that allows Washington to pivot to turning headwinds into tailwinds.”

Joe Lieber of Washington Analysis says that much of the real work, however, “will take place behind closed doors as negotiations begin,” with “bicameral and bipartisan leadership” already being summoned to the White House on Friday "to begin laying the groundwork for a potential compromise.”

Prior to the Friday meeting, President Obama plans to hold a series of fiscal-cliff themed meetings throughout the week “with everyone from the heads of progressive groups to business leaders,” Lieber notes.

Even House Speaker John Boehner, R-Ohio, told members of his party after Obama was re-elected that they needed to fall in line. The New York Times reported that on a conference call after Election Day, Boehner told House Republicans that their party “lost, badly” and that “while Republicans would still control the House and would continue to staunchly oppose tax rate increases as Congress grapples with the impending fiscal battle, they had to avoid the nasty showdowns that marked so much of the last two years."

But Lieber notes in his “Washington This Week” analysis that even if Republicans “have appeared somewhat more conciliatory on taxes in the days following the elections, we continue to believe that any proposals that include an increase in tax rates are a likely non-starter. That said, GOPers from Speaker of the House John Boehner (R-OH) to Sen. Bob Corker (R-TN) have acknowledged that new revenues via eliminating deductions and exemptions will be necessary.”

Any agreement to extend most of the Bush tax cuts and “avert the sequester is slightly likely to slip into Q1 2013,” Lieber notes. “This is due to the complexity surrounding the fiscal cliff itself, its many moving parts, the short six-week lame duck session, and John Boehner’s upcoming re-election as Speaker of the House on Jan. 3. This likely serves to harden his unyielding position on tax rates, at least until after he is once again secure as Speaker.”

Striking a “grand bargain” is also not likely during the lame-duck session, Lieber says. “Some have suggested that the Simpson-Bowles plan could be used as a ‘trigger,’ but it is difficult to see how this is possible. The plan has no legislative language, and it is short on details. Instead, it merely instructs Congress to come up with specific spending reduction plans. For such a plan to be feasible, Congress would first need to fill in the blanks.”

However, Lieber notes that the next “potential catalyst for a grand bargain” will be the upcoming debt limit extension. The Treasury Department now expects this to be necessary in late December, Lieber says, “though it can utilize cash management tools to push that out by 60-75 days. If lawmakers pursue a one-year package, it would require at least $1 [trillion] to $1.4 trillion. To get through the next election cycle would require another $800 billion to $1 trillion, or $1.8-$2.3 trillion in total.”

Senate Majority Leader Harry Reid, D-Nev., has already said in published reports that if the $16.394 trillion current legal limit on the debt must be raised by another $2.4 trillion, “We’ll raise it.” That would set the debt limit at $18.794 trillion.

Lieber adds that “discretionary spending cuts in any serious amount seem unlikely, meaning that taxes and entitlements must be on the table. Of course, it would take the better part of a year for members to agree to such a package, if they can agree at all.”

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