(CNN) — Even before he takes the oath of office for a second time, President Barack Obama has a crisis on his hands. On January 2, 2013, America will begin a long fall off the “fiscal cliff” — unless the White House and Congress can agree on a deal to avert the plunge. And that’s not going to be easy.
“It’s going to be tough to govern” with Congress still split and the Republican majority in the House intact, noted CNN political contributor David Gergen, who urged the president to heed the words of Winston Churchill: “In victory, magnanimity.”
Beyond the domestic agenda, the global economic slowdown threatens an anemic U.S. recovery — while Iran’s nuclear program and Syria’s implosion will also demand urgent attention after the rigors of the campaign trail.
The in-tray may not seem as daunting as the one that greeted Obama on his first day in office in 2009, but he’ll have little time to savor his latest victory.
In fewer than 60 days, arbitrary spending cuts and tax increases will begin to kick in unless the president and Congress — half of which is still controlled by the Republicans — can find a better way to manage debt reduction.
The challenge for Obama and the divided Congress is to come up with a credible consensus that tackles the deficit and doesn’t smother the fragile roots of recovery.
The Tax Policy Center estimates that allowing the Bush-era tax cuts to expire means an average tax increase of almost $2,000 for middle-class Americans. Sucking that much money out of circulation could push unemployment above 9%, according to the Congressional Budget Office.
Obama has declared that the estimated $109 billion worth of automatic budget cuts to defense spending, social services, education and other discretionary federal spending won’t happen. And White House officials — but not the president himself — say he will preserve the Bush-era tax cuts for the middle class but veto any bill that extends the cuts for households with incomes over $250,000.
The expiration of those tax cuts would raise some $500 billion in revenues, according to the latest CBO data.
If the United States doesn’t address the impending fiscal cliff, ratings agency Moody’s has warned of a further downgrading of U.S. sovereign debt.
Foreign governments are watching the situation with trepidation. Sustaining the U.S. recovery is vital to the health of the global economy — with most of Europe mired in recession, Japan facing its own version of the fiscal cliff — its public debt is twice the size of its $5 trillion economy — and growth in China slackening, though most countries would love to have its 7% expansion rate.
Deferring judgment day
Now that the hyper-partisan presidential campaign is out of the way, there may be a window for compromise. But with Congress due to be in session for only 16 more days in 2012, that may extend only as far as a deal to kick the can down the road once more — resulting in a Band-Aid rather than a grand bargain.
House Speaker John Boehner told CNN last weekend that was the most likely path.
“I think the best you can hope for is some kind of bridge,” he said. Boehner and other Republicans have demanded spending cuts and other measures that would exceed any increase in the federal borrowing ceiling.
Deferring the day of judgment is unlikely to impress the markets. Nor will another bout of protracted wrangling over raising the debt ceiling, something that will likely become necessary early in the new year.
In September, Moody’s indicated it would downgrade the U.S. sovereign rating from its “AAA” rating without “specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term.” Standard & Poor’s downgraded the U.S. rating in 2011 after the first bout over the debt ceiling.
And as more baby boomers begin retiring and adding to the burden on Medicare and Social Security, it won’t be long before entitlement programs come under even greater pressure.
Meeting in Mexico over the weekend, G-20 finance ministers cited the U.S. fiscal cliff as the biggest risk to global growth. Canadian Finance Minister Jim Flaherty warned of “dire consequences” if it’s not tackled.
If the fiscal cliff is the most immediate problem, the consequences of a eurozone break-up could be equally as damaging. The G-20 ministers voiced concerns about the “complex implementation” of much-needed reforms.
The potential for the events in Europe to add to the president’s woes is probably underestimated because that situation seems interminable and impossible to unravel. It’s only been a month since the International Monetary Fund warned of “a downward spiral of capital flight, breakup fears and economic decline” in Europe.
Given that EU-U.S. trade was worth $636 billion in 2011 and U.S. investment in the EU was about $150 billion, Europe’s economic health is hardly marginal to America.
The European Union has averted imminent crisis by putting the European Central Bank on steroids, allowing it to use massive financial firepower to buy the bonds of troubled members. But Spain is not yet ready to accept bailout terms, Greece is already dangling off a fiscal cliff and several of Europe’s largest economies are either in or on the edge of recession.
Obama’s foreign policy headaches
While getting a deal on deficit reduction is the top domestic priority, Iran’s nuclear program will likely be the president’s main foreign policy headache.
Obama has said repeatedly that Iran will not be allowed to obtain or build a nuclear weapon on his watch. Israeli Prime Minister Benjamin Netanyahu has a different threshold: that Iran cannot be allowed to achieve the capability to build a bomb. As long as Iran continues to install centrifuges, expand its nuclear facilities and add to its stockpile of enriched uranium, that threshold comes closer to being met.
Israel is as consumed with its own election campaign as the United States has been. For whoever takes office in January — and Netanyahu is favored to win — the Iran issue will again be front and center.
Asked in an interview Monday whether he would “pledge that Iran won’t have a nuclear program” by the end of his next term, Netanyahu said, “Yes.”
Despite the lack of personal rapport between Obama and Netanyahu, Washington will try to restrain Israel in the hope that the damage inflicted by trade and financial sanctions against Iran will bring about a change of heart in Tehran.
Netanyahu has said he won’t be restrained by anyone if Israel’s existence is threatened. “When David Ben-Gurion declared the foundation of the state of Israel, was it done with American approval?” he asked Monday.
The United States will want to delay any military action for as long as possible, given the unpredictable consequences in a Middle East already torn by revolution and Islamist renaissance, and the fear that striking Iran’s nuclear facilities might actually rally support for the regime rather than undermine it.
Sanctions — the favored weapon of the United States and European Union — have curbed Iranian oil exports and other trade, causing a dramatic devaluation in the Iranian rial. High inflation and growing hardship, so the argument goes, will eventually force the Iranian leadership to come to the table for productive talks on its nuclear program.
Several rounds of multilateral talks this year made no headway, giving some credence to Romney’s jibe that Iran is four years closer to a nuclear weapon than when Obama took office. But with the election over, another stab at dialogue is possible without exposing the president to accusations that he’s soft on the ayatollahs.
With Russia adamantly opposed to stiffer United Nations sanctions and a new leadership in China, building an international consensus on Iran will be difficult.
On the other hand, Iranian President Mahmoud Ahmadinejad is weakened as a political force as his second and final term draws to a close. Cliff Kupchan of the Eurasia Group says that unlike in 2009, when a possible deal was sabotaged by regime bickering, Iran’s Supreme Leader Ayatollah Ali Khamenei “is probably strong enough to make a deal stick should he so choose. But a recalcitrant and bucking Ahmadinejad would make that outcome more difficult.”
For the White House — a delicate balancing act will demand a close reading of Iran’s and Israel’s intentions.
But Iran is not the only overseas crisis that needs urgent attention. With every passing week, the revolt in Syria becomes more difficult to influence and more likely to spill into neighboring states.
Some analysts expect a more muscular U.S. approach now that the election is out of the way — one that might include setting up a zone in northwest Syria that is beyond the reach of President Bashar al-Assad’s rule. Secretary of State Hillary Clinton has already foreshadowed a change in approach — saying the United States will engage more with the country’s internal opposition and less with the exiled and largely ineffectual Syrian National Council (SNC), which is Turkey’s preferred representative.
“There has to be a representation of those who are on the front lines, fighting and dying today to obtain their freedom,” Clinton said October 31.
On another front, managing the military drawdown in Afghanistan — something that was rarely discussed in the presidential election campaign — will be another challenge.
Afghan security forces have been stood up; they are more numerous and more capable than four years ago. But two years before the scheduled withdrawal of all U.S. combat troops, the Kabul government looks fragile and the Taliban undaunted. Critics have voiced concerns that the publicly announced withdrawal date only lets the Taliban know how long it must hold out before it can make another bid for resurgence.
Efforts to wean the “good” Taliban off the battlefield and into negotiations has so far gone nowhere. For Obama, whose first campaign stressed winning the war in Afghanistan and getting out of Iraq, the collapse of a government supported by so many billions of U.S. taxpayer dollars would be a humiliating reverse.
Last month, the International Crisis Group said the outlook was far from assuring.
“Demonstrating at least will to ensure clean elections (in Afghanistan in 2014) could forge a degree of national consensus and boost popular confidence, but steps toward a stable transition must begin now to prevent a precipitous slide toward state collapse. Time is running out,” the group said.
Different problems, same solution
Whether it’s Syria, Iran or the fiscal cliff, Obama must use the same principles to find a solution: develop a dialogue, find common ground, exploit opportunities and occasionally employ a well-calibrated threat.
That’s what happened in 1997, when the Clinton administration reached a deal with the Republican congressional leadership to reduce the federal deficit and achieve a balanced budget in five years. The deal cut spending, and it cut taxes by $91 billion over five years — while allowing the debt ceiling to rise to $5.95 trillion.
“We have come to an agreement that will lead us to less Washington spending, to tax relief for working Americans, to security for our senior citizens, and less dependency on government, more responsibility, and opportunity for individuals, communities, and states,” said former Sen. Trent Lott, then the Republican leader in the Senate.
Ahhh, the good old days.
Now the statutory debt ceiling is at $16.4 trillion, with no sign of a deal on taxes or spending.
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