With part of the fiscal cliff successfully negotiated, there is still potential for a fiscal drag that could gradually take effect with the end of some of the Bush tax cuts, the payroll tax increase, and the sequestration spending cuts still on the table.
The Congressional Budget Office, a nonpartisan group for the U.S. Congress, has projected that the country will fall into a recession if legislators allow all changes to go through. Some investment houses have suggested the United States' gross domestic product could shrink by as much as 4.5%. Market and political analysts have said that a Congress may succeed in temporarily pushing back the decision by a few months so that the newly elected Congress could pass a viable budget plan. Onlookers have worried that negotiations in Washington D.C. could mimic the disastrous debt-ceiling discussions in 2011 that led to Standard & Poor's downgrade of the U.S. credit rating.
What we need is stimulus, in the short term, serious deficit reduction, in the long term, and some stability in the future. That's a major problem. We're going to be up against trench warfare and we have not dealt with the long-term deficit problem. In the short term, unemployment should be the number one issue in the country. We have virtually no stimulus and social security taxes are going up.
The White House is saying they will not negotiate on the debt limit. The Speaker of the House, John Boehner, is saying he's through with negotiations. Obama came out and said that there are loopholes that can be closed and fees and taxes that can be raised. The senator minority leader, Mr. McConnell said that taxes are virtually off the table. There is a collision coming soon. The fiscal cliff resolution took about 18 months to get to where we were; even Simpson Bowles said it was a missed opportunity. The only short-term stimulus beneficiaries in the fiscal cliff negotiations were Goldman Sachs, Nascar, and Hollywood. The losers are the White House and Capitol Hill.
Some Democrats on Capitol Hill said the president should look to the 14th amendment, and not allow the U.S. to default and keep on borrowing. It's hard to imagine that they're not going to be tempted to look at that as an option. However, Congress is adamant about not negotiating this. The risk is that Congress may undermine what little deficit reductions are already put in place. They're worried about the underline problem, which is that we have an exploding deficit problem. Republicans think the only way that the president can win on the debt ceiling is by mobilizing the business community and putting huge pressure on Republicans in Congress.
The endless arguements between president and Congress did make things a lot harder. But the issue is will the short-term stimulus make much a difference and can government afford the money needed for stimulus which would enhance the deficit?
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