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Why the U.S. won’t jump off the fiscal cliff

Capitol Hill in Washington. International Monetary Fund managing director Christine Lagarde says the fiscal cliff is one of the greatest threats to the global economy.


Despite all the sound and fury over the fiscal cliff, you'd be hard pressed to find anyone in Washington who thinks U.S. politicians actually will pull a Thelma and Louise and drive their economy over the precipice.

After all the political energy that has been put into economic stimulus in recent years, "it's unthinkable we would have an anti-stimulus of this nature," Tony Podesta, the founder of lobby firm Podesta Group and a Democratic fundraiser, said Thursday during a panel discussion organized by the Property Casualty Insurers Association of America.

This a bi-partisan point of view.

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Speaking at the same event, Doug Holtz-Eakin, a former head of the Congressional Budget Office and an adviser to Republican presidential nominee Mitt Romney, said there is a "70 per cent" chance that Congress would pre-empt a combination of scheduled tax increases and spending cuts that economists say would trigger a recession if they take effect next year as planned.

The confidence of Washington insiders is a stark contrast to the alarm displayed by those who make only irregular trips to Capitol Hill.

International Monetary Fund managing director Christine Lagarde says the fiscal cliff is one of the greatest threats to the global economy. Finance Minister Jim Flaherty has expressed worry. JPMorgan Chase chief executive officer Jamie Dimon said Thursday he has set up a "war room" to deal with any fallout from a failure to secure an agreement.

"There are all of these potential outcomes and I would defy anyone to know what they are," Mr. Dimon said at an event hosted by the Council on Foreign Relations.

Messrs. Podesta and Holtz-Eakin aren't blasé about the U.S. government's enormous fiscal challenge. Congress and the White House must do something dramatic to reduce the budget deficit within the year ahead, they reckon. "We're out of time," Mr. Holtz-Eakin said.

However, policy isn't made in a vacuum. Convincing policy makers requires a convinced voting public. That means getting clear of November's presidential election. And then the new political configuration will need time to negotiate a program that will include any number of contentious measures.

For that reason, Mr. Holtz-Eakin is offering advice to Congress that he likely never will put forward again on a crucial policy issue: punt.

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The "big deal" that is necessary to reverse the U.S. budget deficit isn't possible in the few weeks of government activity that will follow the election. He predicts Congress will agree to allow some of the less contentious tax increases, and he says it might mute the immediate impact of the spending cuts. This would avoid any end-of-year cliffhangers that would spook financial markets.

Mr. Holtz-Eakin's outlook isn't unusual; this is essentially the Washington consensus on how the fiscal cliff will be resolved in the short term. "We have to clear the political space" to make a deal, he said.

It's in the New Year that matters get complicated. No one knows quite how that deal will get made. But the clock will be ticking. Mr. Holtz-Eakin says lawmakers have until August; maybe the end of the year if they are lucky. Any longer, and bond traders and investors surely will give up on the United States, he said.

Mr. Dimon's war room may be quiet through the holidays. A year from now could be a different matter.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More


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