Washington looks poised to suffer from more Congressional dysfunction, having misplaced its “Cialis plan.” That’s the nickname given to US deficit reduction legislation spearheaded by fiscal commission co-head Erskine Bowles. He sought to provide Congress with a solution to be enacted in a lame duck session to avoid scheduled tax hikes and spending cuts, as well as set the framework for a larger compromise between Democrats and Republicans. Its absence from the debate suggests little more than a temporary patch is forthcoming in 2012.
The tax hikes and spending cuts, the so-called “fiscal cliff,” are symptomatic of a broader illness. Years of unbalanced Federal budgets are unsustainable without the kinds of changes mandated in the artificial crisis that Congress agreed to as part of an extension of Uncle Sam’s borrowing limits. But with the economy still fragile and unemployment high, the risk of too much belt tightening is recession. Most of the problem stems from temporary tax cuts initiated by President George W Bush in an era of long-gone surpluses. If allowed to finally expire, the tax hike would eat up $450 billion in 2013. Another $100 billion will be cut from spending, including from the politically tricky-to-touch defence budget.
Washington’s fiscal infirmity inspired Bowles to attempt to convert his $4 trillion deficit reduction plan into legislative language and campaign for Congress to have it at the ready, like the erectile dysfunction medication from which it took its name, “when the moment is right.” Dozens of lawmakers apparently supported the initiative, as did CEOs like BlackRock’s Larry Fink, but the lame duck session does not appear to be poised to take it up after all.
More than anything, that suggests any plan to avoid going over the cliff — a probability that senior Wall Street executives peg at 50-50 at best — will be little more than a temporary patch. That may buy time, but doesn’t necessarily set the parameters needed to negotiate something broader resembling the fiscal commission’s plan, with proper tax and entitlement reform.
Markets could live with this, of course. So probably could rating agencies — for a time. They’ll give Uncle Sam some additional time next year to clean up his act. But if the Congressional shenanigans continue in 2013, with yet more temporary measures, further loss of confidence from rating agencies might be the least of Uncle Sam’s worries.