2012 Elections: Washington’s Single Focus

It’s one year from the elections, and both parties are standing firm. The deficit reduction negotiations have taken their toll.

This is really the only possible outcome. Three months after the unending summer negotiations, which raised the federal debt ceiling in a last-minute agreement, neither Democrats nor Republicans are ready to work together in Congress to find new methods of reducing the public deficit.

This time, there isn’t a risk of defaulting on American debt, as there was in July, and as a result the two camps have not been able to find a middle ground. There is just one year before the general elections in 2012, which puts a third of the Senate and the entire House of Representatives up for re-election. Neither party would dream of ceding even an inch of ground to their opponents. They clash over the same questions as always: Tax cuts for the rich and spending for social programs. The current political divide seems impossible to overcome.

The supercommittee was, of course, doomed to failure. Created in August, its six Democrat and six Republican members are supposed to be forming a working bipartisan project. However, as usual, those responsible are pointing fingers at everyone else for not reaching a compromise. This includes both Republicans and Democrats, with President Barack Obama himself sitting at the top of the list.

The real problem runs deeper, however. This is a country that votes once every two years, and where every single decision from an elected official is publicized, analyzed, and possibly used against him. In Washington, Congress is only thinking of next year’s vote. No one wants to be part of a compromise that they will not be able to defend in front of next year’s voters. Most liberal Democrats have not forgiven Obama for giving up ground to the Republicans at the end of 2010, when he agreed to extend tax breaks for the wealthiest households in exchange for an extension of unemployment benefits. On the other end of the spectrum, the Tea Party, an anti-government movement that is throwing its weight around in the Republican primary, categorically rejects any suggestion to raise taxes.

Ironically, if Congress fails to reach an agreement, the deficit should decline noticeably. There are 1.2 billion dollars of automatic cuts over a period of 10 years, half of which comes from the defense budget, along with the end of some programs and tax deductions. Some of these measures would support economic recovery, but will probably instead be sacrificed in the mire of permanent legislative blocks.

At the end of this year, two significant social programs will expire: Cuts in Social Security expenses, which Barack Obama would rather strengthen, and the extension of unemployment benefits from 26 to 99 weeks. This will directly cut over 160 billion dollars of purchasing power from the American people, which could cost up to one percentage point of the GDP. One million jobs will also be put in jeopardy. The White House is hoping for a bipartisan agreement on both of these measures when Congress returns from its Thanksgiving recess, but many obstacles still stand in the way.

For now, the issue of a new downgrading of the U.S. credit rating has been put to rest. “The Fiscal Committee’s inability to agree on fiscal measures that would stabilize U.S. government debt as a share of GDP is consistent with our Aug. 5 decision to lower our rating to ‘AA+’,” said Standard & Poor’s on Monday evening. Moody’s, for its part, explained that the supercommittee’s failure would not lead to a downgrade on its own and that it would not push their decision further. However, the agency cautioned that the deliberations would be “informative for the rating analysis.” Far beyond simple measures of fiscal adjustment, what is most worrying is the unwillingness of the political class to cooperate with each other and to make necessary sacrifices, while just last week, public debt surpassed 15 trillion dollars.

On the other hand, the failed negotiations promise to be a hot topic for the presidential campaign. The Republican field is already launching fierce attacks on Barack Obama, focusing on his lack of leadership. The president refused to take part in the negotiations simply to avoid association with the inevitable stalemate. Granted, the lack of agreement has not dealt with the volatile package of tax breaks doled out under President Bush, which will expire at the end of 2012. The Democrats are only interested in extending its benefits for the middle class.

This will undoubtedly be a major topic in the presidential election. It will likely remain so, as the most probable Congressional result will be balanced, with no party securely in power. Any obstacles could have serious repercussions. Ben Garber of Moody’s warns, “You’re taking a weak economy and removing a large part of potential demand, which could be enough to tip us into recession.” Democrats and Republicans must put aside their partisan differences and learn how to work together again in order to avoid the worst of this forecast. Nevertheless, with the elections coming up, it’s futile to expect much from Congress.