A Sober Wake-Up Call The Morning After

by: James Picerno

President Obama was re-elected yesterday, and we wish him well. But the news is already ancient, given the pressing demands of defusing the fiscal cliff threat--a deep round of tax hikes and spending cuts slated to start in January if politicians don't intervene. Failure isn't an option here, given the dire effects these cuts and tax hikes could inflict on the still-struggling economy. Unfortunately, that's the likely scenario if politics as usual prevails in the weeks ahead. It's hard to imagine anything else at the moment, given the rancorous, hyper-partisan atmosphere that's defined the Beltway bunch for the past year.

Maybe the sour mood will evaporate now that Obama has won a fairly decisive victory in the Electoral College-303 votes for Obama vs. Romney's 206, with 270 needed to clinch the deal. Maybe, but don't count on it. There are several factors that will impede a quick solution to the fiscal troubles that loom, starting with the fact that the U.S. government remains divided: A Democrat in the White House and a Democrat-controlled Senate paired with a Republican-dominated House of Representatives. In other words, nothing much changed yesterday in terms of the balance of power in Washington, and so the potential for political dysfunction is as strong as ever.

It's an open question if a lame duck Congress will work with the President to resolve the fiscal cliff risk that threatens to push the economy into recession. The same question can and should be posed from the perspective of 1600 Pennsylvania Avenue: Can the President work with a lame duck Congress? We're about to find out, and the stakes couldn't be higher.

The President, however, has an opportunity to lead the country away from economic disaster if he can rise to the occasion and forge a consensus. Perhaps he'll be mindful of his legacy and go above and beyond the call of duty and reach out to the Republican-controlled House and bridge the bitter divide that's brought the country to this perilous point of fiscal vulnerability. But it's not going to be easy. As The Wall Street Journal reminds:

Mr. Obama, whose relationship with business deteriorated over his first term, will face daunting economic decisions almost immediately. That is because the most pressing economic issue after the election is the so-called fiscal cliff, a combined $500 billion in spending cuts and tax increases that begin in January unless Congress and President Obama cut a deal to delay or replace them before then. The White House and congressional leaders postponed negotiations until after the election, waiting to see which party emerged with more leverage.

The best, and perhaps last hope is that the election changed the political climate in Washington, if only slightly. Republicans, relieved of the pressures of the election, can focus on resolving the fiscal cliff by truly working with the White House to defuse this ticking time bomb. Ditto for the President.

The real challenge is time-there's very little of it left before fiscal disaster strikes. "Getting a deal on long-term fiscal soundness is paramount to move forward and to see the economy really keep improving," opines Bill Daley, former chief of staff for Obama..

Failure would be especially tragic. The economy, while still weak, continues to grow, as recent economic news shows. It's not inconceivable that stronger growth is possible, perhaps even likely, in the absence of fiscal cliff risk.

In other words, the fate of the economy in the near term is heavily dependent on political decisions in Washington in the coming days and weeks. That's a frightening thought for so many reasons, but it's reality. For once, maybe the politicians are up to the challenge. If they're not, we'll see the blowback in the economic reports, and perhaps soon. Meantime, hope and change is the only game in town.