Is US Headed For Fiscal Cliff, Or Mitch McConnell To The Rescue?

Congress has only four days to strike a deal on the so-called fiscal cliff that, if left unaddressed, could tip the U.S. economy back into a recession --  and ripple in other ways through global stock, bond and currency markets. The current political impasse on the Hill looks like this: 'Please go first.' 'No, you go first, I insist.' That, as taxpayers wait to see whether or not they will be spared the across-the-board income tax increases and major federal spending cuts scheduled to take effect starting Jan. 1, 2013.

President Barack Obama returned to Washington on Thursday, in hopes that he can reignite the talks. U.S. Senate Majority Leader Harry Reid, D-Nev., on Thursday said the lack of progress in bipartisan talks appears to be pushing the nation toward the dreaded edge.

“It looks like that’s where we’re headed,” he said.

The House of Representatives is expected to reconvene on Sunday, in hopes of hammering out a deal that could pass before next week's deadline.

McConnell To The Rescue?

U.S. Senate Minority Leader Mitch McConnell, R-Ken, who to date has managed to largely stay out of the fiscal cliff showdown, has been brought in as a new player in this high-stakes poker game.

U.S. House Speaker John Boehner, R-Ohio, and others have said the House will evaluate and act on whatever the Senate can pass, so long as the Senate makes the first move. But members of the Senate are saying without the glimmer of cooperation from the House, Senate passage of a bill is unlikely.

According to Bloomberg News, McConnell has three options to avoid the approximately $500 billion in tax increases and spending cuts in January, if Senate Democrats forward a fiscal package. He can: 1) try to forge a bipartisan deal, 2) block a proposal from Reid, or 3) stand by and do nothing.

Henry Aaron, a tax and budget policy expert, believes a deal can be struck before Dec. 31, adding that in his interpretation the real deadline is when the debt ceiling rolls around.

“A [fiscal cliff] deal on Jan. 5 would be almost as good, and on the 10th almost as good as that,” he said. “This is not a cliff, but a slide. By the time the debt ceiling bites. That is the real deadline.”

All eyes are on McConnell now, who has asked that the Senate take a look at the legislation passed by the House to extend tax cuts for all, and to consider modifying the House plan.

“If he can deliver a ‘no filibuster’ guarantee, it's the best hope,” Aaron said. “Assuming that the Senate can pass something, the question would then become whether there is, in fact, a majority in the House composed of most Democrats and some Republicans to agree with what the Senate did.”

Thomas Whalen, political historian at Boston University, sees McConnell as the backroom guy “who knows how to cut these deals.”

But while the Senate could pass something Thursday or in the next couple of days, Whalen said getting a House vote on it is unlikely.

The White House and Republicans appeared close to a deal earlier this month, when they both made concessions. Obama increased the income tax hike threshold from $250,000 to $400,000, and House Speaker John Boehner was willing to impose an income tax rate increase on those making more than $1 million a year.

However, Boehner walked away from the table and tried to push his “Plan B” through the House, but it failed when tea party faction members voted against it because it included a tax increase. These Republican House members, among others, have opposed all tax increases to date.

“It is going to take the president pulling the leadership together,” said Alice Rivlin, senior fellow at Brookings and a former founding director of the Congressional Budget Office. “Everybody has to be involved. I just don’t know who will go first at this point.”

Rivlin, who was a member of the president’s Debt Commission, said lawmakers could strike a deal just to avert the cliff, then work on a plan for 2013. That deal must include some tax increases, especially on high-income earners, and some spending cuts.

"The deal between the speaker and the president is the starting point," she said, adding the two “were very close.”

The problem is that the base of each party is forwarding strong resistance to deals that require each to compromise on core items. Democrats are proud of their record of defending entitlements, and Republicans have a 20-year-strong anti-tax stance that is keeping them from brokering a deal. Both agree that cutting spending and increasing revenues is a must to begin to solve the nation’s fiscal problems, but the canyon is wide regarding the means.

“What Congress is doing now is nuts,” said Ron Haskins, a former White House congressional adviser on welfare /income maintenance issues. “We know what to do -- it’s increasing revenue and cutting spending -- so why are we putting the country at risk? We should’ve done this a long time ago.”

Haskins, also a senior fellow at Brookings, sees a number of alternatives. There could be a deal that’s in Obama’s favor, possibly one that's close to his last offer. Another scenario is a modest deal of $2.5 trillion or less in net deficit reduction. Or lawmakers could extend all tax cuts, except for millionaires.

Lawmakers can also choose to go over the cliff, which probably would trigger a market reaction, and “Republicans could vote for more revenue and argue with a straight face that it is not a tax increase and that they are fighting off a large tax increase,” Haskins said. If the U.S. goes over the cliff, any vote on/after Jan. 1, 2013 to extend the tax cuts would, technically, be a vote for a tax cut because taxes will have increased on Jan. 1, 2013.

And while Haskins thinks McConnell just might get things done, another problem is raising its ugly head. McConnell might have some heavy competition in his 2014 re-election bid. That’s the same seat that actress Ashley Judd, a Democrat, is thinking of running for.

“He could lose the nomination to be the Republican candidate, and he doesn’t want to split the party,” Haskins explained. “He needs all the help he can get to beat the Democrats.”