Fiscal Cliff Looms Large as Congress Leaves Town

A much-reviled Congress has now departed for a five week vacation — leaving behind a mountain of unfinished work as well as renewed anxiety that lawmakers and President Obama will be unable to get their act together in time to avoid slipping off the fiscal cliff at the end of the year.

With a fifth of the contiguous U.S. suffering from extreme drought, the House last week blocked action on a new five-year farm bill that included drought relief funding, along with more controversial measures. Meanwhile, the Senate — which overwhelmingly passed its version of the farm bill — snubbed a $383 million package of emergency loans and grants for livestock producers and other weather-stricken farmers that the House had rushed through at the last minute.

Senate Republicans also blocked a that stood at the top of the Obama administration’s national security agenda. Sen. John McCain of Arizona and other Republicans sided with the U.S. Chamber of Commerce in saying that the proposed rules would be too burdensome to corporations. The bill would have established new standards for computer systems that regulate such key infrastructure as power grids, dams and transportation.

On top of all this, the two chambers also left for their August recess without resolving how or whether to extend the Bush-era tax cuts scheduled to expire at the end of the year. The Democratic –controlled Senate approved an approach that would raise tax rates on families making more than $250,000 a year, while the Republican-dominated House approved a version that would extend the tax cuts for all Americans, including the wealthiest.

“How can you view what this Congress has done and the way they are slinking out of town with anything but negative reactions — in particular, I think, the embarrassment over the farm bill?” Norman J. Ornstein, a congressional scholar with the conservative American Enterprise Institute, told The Fiscal Times on Friday. “Here you have what really is a must-pass piece of legislation, especially because of the drought and the impact it’s having on farmers, rural areas, and the economy. And the House, for really narrow and rigid ideological reasons, couldn’t come together.”

What Gridlock Wrought Last Year

Exactly a year ago, Congress and President Obama hit a political nadir by coming within an eyelash of provoking a government shutdown and the first-ever default on U.S. debt in a brutal dispute over whether to raise the federal debt ceiling. That wasn’t the first time that the two parties played politics with the distasteful task of raising the debt ceiling, but their bitter squabbling shook up the international markets and drew sharp reprimands from financial and government experts.

At the last minute, Obama cut a deal with Republican leaders in the House and Senate to reduce the cumulative deficit by about $2.5 trillion over the coming decade in return for the Republicans’ consent to raise the Treasury’s borrowing authority from $14.2 trillion to as much as $16.6 trillion. But just days after Congress passed the agreement in late July, the ratings firm Standard & Poor’s downgraded U.S. Treasury debt from the Triple-A rating the government had enjoyed for 70 years  saying the budget deal didn’t do enough to address the gloomy outlook for America’s finances.

S&P said the downgrade “reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.” The ratings agency also blamed the weakened “effectiveness, stability, and predictability” of U.S. policymaking and political institutions at a time when challenges were mounting.

In the wake of the debt ceiling controversy, Americans’ approval rating of Congress plummeted to the lowest ever recorded by the Gallup Poll. Just 13 percent of those surveyed approved of Congress’s performance. Only 21 percent of registered voters in an August 4 - 7, 2011, USA Today/Gallup poll said they thought that most members of Congress deserved to be reelected.

The public’s attitude about Congress subsequently soured even more — if that seems possible — before rising slightly to where it is today, with 16 percent of Americans approving and 78 percent disapproving of the performance of lawmakers. By contrast, 47 percent of Americans say they approve of Obama’s performance, according to Gallup.

The debt ceiling deal had some virtues. It made a nearly $1 trillion down payment on long-term deficit reduction. Far from resolving the two parties’ fiscal differences, the agreement only delayed some of the toughest decisions for another year — including how to go about achieving an additional $1.5 trillion in savings.

When a special “Super Committee” of House and Senate Democrats and Republicans failed to agree on how to achieve those additional savings late last year, the new law called for automatic across-the-board cuts in both defense and discretionary spending to achieve the goals, beginning in January 2013. Now House Speaker John Boehner, R-Ohio, and many other House and Senate Republicans are having buyer’s remorse for having signed off on that budget deal, fretting that the defense cuts will hollow out the military.

Lockheed Martin, EADS North America, Pratt and Whitney and other major defense contractors have warned of the potential for widespread layoffs if the cuts take effect. And last week, McCain, Sen. Lindsey Graham, R-S.C., and Sen. Kelly Ayotte, R-N.H., barnstormed across Florida, Virginia and North Carolina predicting dire consequences for U.S. forces and national security unless Congress blocks sequestration of the defense budget.

Ornstein told The Fiscal Times that it’s outrageous for lawmakers to reverse direction on spending cuts after voting for last summer’s Budget Control Act. “The game they played over the sequester almost makes you believe that they never voted for it in the first place,” Ornstein said. “I remember vividly John Boehner — at the time that they put together the Budget Control Act — saying, ‘I got 98 percent of what I wanted.’ John McCain voted for it... Now it’s as if they are denying parentage despite the fact that the DNA tests are conclusive.”

Eye on November

Chastened by last summer’s experience, neither party appears willing to risk a government shutdown or another fiscal crisis before the crucial November election, when voters determine which party controls both the White House and Congress beginning next year.

Last week, Obama, Boehner and Senate Majority Leader Harry Reid, D-Nev., agreed to put off for six months approval of the fiscal 2013 budget and avoid a government shutdown under a continuing resolution. That deal will fund the government at its current $1.047 trillion level. “This agreement...provides stability for the coming months, when we will have to resolve critical issues that directly affect middle class families,” Reid said.

With few exceptions, the two parties will attempt to preserve the status quo through the November election — and then decide whether it makes sense to make quick deals on the budget and taxes or wait until a new Congress and possibly a new president take office next January.

One of those exceptions surfaced late last week, when the Senate Finance Committee approved a bipartisan bill that would prevent the Alternative Minimum Tax from impacting millions more taxpayers next April. The ATM was originally designed to make sure wealthy Americans didn’t escape paying taxes, but over the years it’s added to the tax burden of millions of upper middle-income families and individuals.

The Finance Committee measure would also extend or revive nearly 50 tax breaks for businesses and individuals, including a credit for conducting research and development. Finance Chairman Max Baucus (D-Mont.) and the panel’s ranking member, Sen. Orrin Hatch (R-Utah), suggested the committee’s work showed that Democrats and Republicans could still work together on the charged issue of taxes. And Baucus expressed hope that the two sides could come together on big-ticket issues like the Bush-era tax rates and looming automatic spending cuts.

But if the past is prologue — don’t count on it.