In a city consumed by political tactics, talk about the "fiscal cliff" dominates discussion in Washington.
With only eight legislative days before the Christmas break, Republicans and Democrats are swapping proposals to raise revenues and cut spending so that much more sweeping and mandatory measures don't happen after Jan. 1. Without some new decisions, what Congress had previously mandated will come into force, throwing the U.S. economy over the proverbial "cliff" and into a recession and, of course, dragging down the Canadian economy.
Such is the short-term situation. But anyone who spends time in Washington listening to sharp observers of the U.S. scene appreciates two larger and more challenging issues for 2013, the first year of President Barack Obama's second term: a "grand bargain" to resolve America's long-term budgetary challenge; and Iran's nuclear program.
The decisions about these two issues will be critical for the Obama presidency and international economic and military stability. And in the cycles of the U.S. presidency, an incumbent's ability to influence behaviour of others begins to fade after a year, or perhaps two, in the second term.
The "grand bargain" (Americans love slogans) is a deal between Democrats and Republicans to tackle a disagreeable, dangerous fact: rising U.S. debt and huge deficits.
According to the Congressional Budget Office, the federal budget deficit was $1.1-trillion for the fiscal year that ended Sept. 30. For four consecutive years, the federal deficit has exceeded $1-trillion. Deficits like that pile atop each other, driving up debt.
If the U.S. remains on this track, the CBO warns that, by 2022, the "level of federal debt would be unsustainable both from a budgetary and an economic perspective." The debt-to-GDP ratio, the one economists especially watch, would be approaching 100 per cent – the level it almost reached in Canada in the mid-1990s before the Chrétien government restored Canada's fiscal health.
Somehow, the Obama administration and the House Republicans have to negotiate throughout 2013 a deal that will raise revenues substantially while also cutting defence and social entitlement programs. Or at least that's how the debate is being framed in Washington, a city riven by deep ideological cleavages.
What many economists think would make sense – a national sales tax or a Canadian-style national value-added tax – isn't on anyone's radar screen. Such a tax, which exists in all other Western democratic countries, is deemed too politically toxic. The Obama administration is only proposing tax increases on the wealthiest Americans, whereas independent analysts understand that the U.S fiscal situation is so dangerous that taxes need to go up on middle-class Americans, too.
Instead of raising tax rates, lots of people are talking about lowering deductions. Go ahead and try. These deductions include such politically explosive ones as mortgage and property tax deductibility, charitable donations and private health-care plans.
Spending reductions are always much easier to talk about than execute. Powerful interest groups are already mobilizing against change: the seniors' lobby against tampering with social security and government health care for those over 65; unions and social policy groups against reductions in health care for low-income Americans; and the defence lobby against cuts to the military.
In foreign policy, Washington is consumed by the Middle East and China. In the Middle East, the biggest challenge is Iran, with 2013 apparently the year of decision.
Why? Mr. Obama has decided his policy to prevent Iran from acquiring a nuclear weapon, rather than to try to contain Iran after it has secured one. Iran continues to add centrifuges and further enrich uranium for weapons, and might be able this year to break out toward a deployable weapon.
This timetable adds urgency to a decision. So are the effects of sanctions, which are hurting Iran. (Its currency is spiralling down and inflation is rising.) The European sanctions against importing Iranian oil are starting. Will sanctions be sufficient to change Iran's behaviour, what with a presidential election coming in that country in June, and a parliamentary one in Israel next month?
An American-Israeli attack on Iran would delay but not eliminate Iran's program. The reverberations would be felt throughout the entire Middle East. The common phrase in Washington to describe the options: "All of them are bad." One will have to be chosen in 2013.