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Frank A. Weil

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A Better Outlook Beckons

Posted: 03/16/2012 7:45 pm

The combination of hot air from politicians' breath meeting the cold air of economic declines produces fog in much the same way marine salt air fog is created -- and with much the same effect: hard and risky to find one's way around. Now, the global fog seems to be beginning to lift a bit and the way ahead in terms of national security and economic health seems clearer, at least to this observer.

Let's take a little tour to see where we stand today, ending with what may very well be a big piece of news in the United States.

Europe: Europe has been struggling with fallout from its somewhat incomplete union. European nations took first steps about 15 years ago with a political and monetary union, but postponed deciding on budget and tax fiscal issues, essential to a real union, because they could not achieve agreement at that time.

Now that the Greek solution has been essentially completed -- not to everyone's liking or forever -- it is likely to last long enough for Europe to get on with next essential steps.

While it is true that Greece and all of Europe are risking more economic slowdown because austerity has, for the moment, trumped stimulus, the overall outcome is that Europe should now be able to begin to get back on track.

One big bank of fog beginning to clear!

The Middle East: Here, I reserve a caveat on any views expressed based on the story about the elephant, who was carrying a scorpion on his back across the Red Sea. Despite a promise by the scorpion that he would not bite the elephant en route, the scorpion did bite, dooming them BOTH. Dying, the elephant asked, "What was the point of that?" The scorpion answered simply, "It's the Middle East!"

That said, the Middle East is slowly, painfully sorting itself out.

A military solution with Iran looks increasingly likely to fail strategically. And the present Iranian regime is already apparently casting about for new solutions?

Russia is undergoing a transition and democracy is rearing its challenging head usefully, but so far Russia has not been helpful in reining in Syria.

It begins to look like today's elephant may yet get the scorpion and himself safely past the Straits of Hormuz.

A second fog thus appears to begin to clear!

Asia: China increasingly dominates the scene with its incredible economic growth and fascinating combination of market democracy and an inscrutable centralized power system.

Japan appears to have discovered how to exist reasonably well in a no/slow growth environment.

The rest of Asia is closely aligned with either China or the U.S. and is doing quite well.

If ever there was a case of genuine mutual dependency between two great global powers, this is the biggest, best example so far in all history. China needs us badly and we need them just as badly. There will be, of course, the usual noises on both sides about sovereignty, dignity and security. But, it is virtually unthinkable that either country will do anything completely stupid and counterproductive, unless our election goes totally nuts!

So, a third front of fog appears to be lifting!

United States: Let's start by putting aside all the soft issues of religion, contraception -- even immigration -- which are real but at the moment secondary.

The big questions are, and relate to, the economy and our financial system. There, the biggest issues are the deficit, tax policies and stimulus policies. A couple of years ago, the president asked Simpson-Bowles to sort through that mess of conflicting issues and opportunities and come up with a plan to reduce the long-term deficit yet continue growth. They did a superb job, given the circumstances, but fell one vote short of what was needed to formally present their plan to the Congress.

Since then, more and more people appear to yearn for what Simpson-Bowles promised. Timing is everything and this fall may be the moment!

Now we have an amazing, unique, opportunity opening up ahead of us in the period between the election in November and January 1, 2013.

The stage is set by remembering two vital facts:

1. On January 1, 2013 the Bush tax cuts expire. Over 10 years that would knock off more than $4 trillion from projected deficits. In short, new taxes would lead to a very healthy deficit reduction, accomplished with zero political action. Because such a precipitous tax increase would create a big drag on the recovering economy; that step by itself is not the right way to address our deficit problems. And if nothing is done (the thing our elected officials often do best), those tax cuts die and are G-O-N-E.

To be restored in any way at all, short of a Grand Bargain, the Congress and a president would have to take many painful, difficult and slow political steps necessary to pass any new tax bill. And if either party has effective control of at least one side of Capitol Hill, a new stalemate could freeze action on these issues for a very long time.

2. Also on January 1, 2013 the sequestrations involving defense spending and domestic program cuts that became law with the failure of last year's deficit commission take effect, unless modified by the Congress and not vetoed by the president. Very few Republicans or Democrats expected or want that package of draconian cuts to become law and if they can possibly avoid it, they will.

When faced with bad alternatives, as well as responsibility for their consequences, most politicians ultimately compromise, as the Republicans just did with the payroll tax cuts.

So what is most likely to happen after the November election?

If, as is most likely, Obama is reelected, he will have a broad mandate on his position on all these issues. He will in all probability still hold enough seats in the Senate to deny the Republicans the 60 votes now necessary to legislate per their own precedents. He most probably will be willing to play hardball with the Republicans on high-income tax cuts.

Similarly, he will play hardball on the sequestration issues. And having four more years of Obama ahead, if you were a Republican, under those dire circumstances (from their perspective) what would you do? Sit down and talk very soon and fast!

If Obama loses, whoever is President Elect will be elated, but almost powerless, between the election and January 20th unless he can count on both houses of Congress to have challenge-proof majorities including 60 votes in the Senate, which looks very unlikely to this observer. He would be unable to continue or restore those tax cuts to his liking, as well as to deal with the sequestrations, putting him in a similar but opposite position as Obama has been in dealing with today's Congress.

So what happens then?

Both House and Senate sides, despite all their ideological, political reasons and needs, will feel compelled to do something before January first and Obama, either as an outgoing or continuing president, will have good reasons to support a compromise.

They have a starting blueprint with Simpson-Bowles. The idea of getting rid of Obama will have been settled once and for all, one way or the other, so that will no longer be a goal or obstacle. That is why there will be a Grand Bargain for a national Christmas present this year.

The bargain, once reached, should be relatively easily passed by both houses of the lame duck Congress, and signed by Obama, which would preempt the January first forced witching hour and would put the next presidential term off to a great start.

There goes the U.S. fog bank. And, with fog beginning to lift over the rest of the world, this observer is becoming increasingly positive about our economic, political and financial outlook.