Fiscal Cliff: Are We About to See Compromise in Washington?

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Now that Election 2012 is over, Washington is readying for its next battle: the fiscal cliff.

U.S. President Barack Obama's victory in Tuesday's election has upset the Republicans' political calculus. The purpose of four years of obstruction was to deny the president any legislative achievements and thereby prevent his re-election.

It didn't work.

With the election behind us, the politics of obstruction has lost its meaning. There is nothing to be gained from obstruction for obstruction's sake.

Boehner made that abundantly clear when he read a statement Wednesday afternoon in which he opened up the possibility of compromise in order to avoid the looming fiscal cliff at the end of the year.

"For purposes of forging a bipartisan agreement that begins to solve the problem, we're willing to accept new revenue, under the right conditions," Boehner said.

"The president has signaled a willingness to do tax reform with lower rates," Boehner continued. "Republicans have signaled a willingness to accept new revenue if it comes from growth and reform. Let's start the discussion there."

How Boehner Can Avoid
Fiscal Cliff Effects

Both Republicans and Democrats need to avert the pain of the fiscal cliff if at all possible. Some action must be taken before year-end.

However, Boehner needs to push for a grand bargain during the current lame duck session of Congress. Why?

Although Republicans have retained their control of the House, their majority in the next session of Congress will be narrower. For at least the next two years, Boehner will never be in a stronger position than he is in today.

Having lost the presidency, giving the Democrats a larger majority in the Senate and a larger minority in the House, Republicans have no choice but to set the stage for the midterm election in 2014 and to nominate a credible candidate for president in 2016, when the Democrats are likely to be more vulnerable.

Boehner's best first step toward those goals is to get as many concessions as he can now while the clock is ticking on the fiscal cliff and Republicans are in a position of relative strength.

Most observers agree that Boehner was personally committed to making a deal in the summer of 2011, but he was unable to muster enough support from the more radical members of the Republican caucus to get the job done. That's when Republicans and Democrats failed to reach a broad agreement on taxes and entitlements.

With his party chastened by the election result, Boehner may be able to make a better deal and deliver the votes now, while both parties are facing the fiscal cliff deadline, than he will be able to do in 2013 when there are fewer Republicans in Congress and no time pressure.

Financial markets were sharply lower on Wednesday as the imminent danger of the fiscal cliff emerged from behind the shadow of the election.

If Washington is having a rethink, it may give the markets a reason to believe that a political solution to the fiscal cliff may be within reach.

Investors: Do you know the U.S. economy's biggest danger, the fiscal cliff, is actually a triple threat to our money? Our Chief Investment Strategist Keith Fitz-Gerald explains.

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