Wednesday morning America woke up and found that the economic crisis known as the “fiscal cliff” remains unresolved. However, President Obama has cut his Hawaiian vacation short and will be returning to Washington, DC Wednesday evening. But, Republican House Speaker John Boehner is not going to call the House of Representatives back in session unless the Senate acts on two bills that the house has passed. The first bill permanently extends the Bush era tax cuts on everyone, while the second eliminates the “sequestration” defense cuts and replaces it with severe cuts on social programs.
Neither bill will pass the Senate, but if they did, President Obama would veto them. On the other hand, the Senate has passed a bill that would extend the Bush era tax cuts permanently on households making less than $250,000 per year. Households with incomes above that level would receive the same tax cut up to $250,000 a year with the remainder of their incomes being taxed at Clinton era tax rates. It is conceivable that Senate Majority Leader Harry Reid responds to Boehner by urging him to let the entire house vote on the Senate bill.
With Boehner not returning to Washington, Senator Reid has no one to negotiate with, even though the president will be back in town.
Most observers now believe that the country will indeed stumble over the fiscal Cliff. The first and most dramatic impact will be on Wall Street where stocks are expected to take a dramatic fall on January 2, 2013. Observers believe that should this happen it would be sufficient to move Congress to resolve the crisis. However, don’t expect there to be any “big” deal. It is likely that Congress will continue to act it has since 2010, cowardly and will pass some tax relief some unemployment insurance extensions resolve the problem with the alternative minimum tax and grant its annual Medicare doctor “fix”.
Congress may also attempt to delay implementation of this quester and tie it to a battle they anticipate this spring over the debt ceiling. The other and best option is that when the new House of Representatives comes to Washington in January, Speaker Boehner will have better control over his caucus and might be able to deliver a deal that is acceptable to both sides.
When Boehner brought his “Plan B” to a vote last week he was 20 votes short of a caucus majority. Many believe that with the new Congress he will have the votes he needs to have a majority of his caucus approve a deal.
So, the question for US economy is has the Grinch (or the Republican Party) stolen Christmas or merely postponed it?