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US plunge off 'fiscal cliff' is likely, say debt gurus Simpson and Bowles (+video)

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A balanced framework remains essential to strike a deal, and the looming fiscal crisis provides a "magic moment" to get it done, says Bowles. "To get something done in this town, you need a crisis – and we've got it," he says. But a bipartisan plan still requires support in both chambers from both Republicans and Democrats.

Here's the state of play, as they see it:

  • The White House is serious about reducing government spending, including on health-care entitlements. Mr. Obama also wants $1.5 trillion in new tax revenue over a decade, including a rate increase on the top 2 percent of earners, but "there is some flexibility there," says Bowles. "The White House wants to make sure that the revenue actually comes in ... and thinks that the only way to make it real is to have it come out in higher rates." There has been "no serious discussion yet" on entitlement cuts and reform, he adds.
  • Republicans are open to accepting new revenue, but less of it than the $1.5 trillion Obama wants – and none to come from rate hikes on the wealthiest Americans or anyone else. GOP leaders want to bring down the federal deficit mainly through spending cuts and entitlement reform. Speaker Boehner says he is also open to simplifying the tax code and cutting some tax breaks. Bowles and Mr. Simpson say they are encouraged by recent statements by GOP senators conceding the need for tax hikes and, most recently, by comments from Rep. Tom Cole (R) of Oklahoma advising House Republicans to agree to extend the expiring Bush-era tax cuts for all but the top 2 percent as part of a debt deal. That's a break from the GOP bargaining position prior to the November election.
  • Democrats are focused on more revenue and are reluctant to take up entitlement reform. Even Sen. Richard Durbin (D) of Illinois, whom Simpson praised for taking a big political risk by endorsing entitlement reform as a member of the Simpson-Bowles commission, took a harder line in a speech Tuesday to the Center for American Progress, where he ruled out changes to Medicare and Medicaid as part of a debt deal. Democrats don't want Social Security reform to be part of a deficit negotiation, but rather as a "parallel process" to make sure the program remains solvent.
  • Business groups are already reacting to Washington's apparent lack of progress on resolving the fiscal crisis by slowing hiring and investment. The stock market has not yet factored in the possibility that the country will go over the fiscal cliff, says Bowles. "They don't think we're stupid enough to do that." If it happens, the stock market will crash, he says.
  • The government's creditors are approaching a "tipping point," possibly within three months, if Congress and the White House prove incapable of resolving the debt crisis, says Simpson. The tipping point will come when "the people who have loaned us 16 trillion bucks" see a government unable to act and want more money to buy US bonds. "Then, inflation will kick up, and guess who will get hurt the worst? The little guys."
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