Monday, January 14, 2013

First published on December 14, 2012 via email newsletter 'Fiscal Cliff Notes.'

A Republican Senate staff member summed it up this week nicely when he said US House and Senate Republicans cannot see “see the end game” on the fiscal cliff negotiations. This has led to discontent within the GOP Senate caucus toward Minority Leader McConnell (R-KY) who has taken a hard line on the fiscal cliff. Some Senate GOPers feel McConnell’s drop anchor and hold on strategy didn’t work before and won’t now. As Sen. McConnell is not directly involved in fiscal cliff negotiations, that being Speaker Boehner’s (R-OH) job, Senate Republicans have largely coalesced around an approach to allow top tax rates to increase and use the debt ceiling to go after spending and entitlement cuts.
Democrats do not think that linking spending and entitlements to the debt ceiling is a winning strategy and are more than happy for the GOP to pursue that strategy. Clearly these negotiations will push up against the yearend deadline with Members being instructed to keep holiday plans on hold, as reported.
The outlook from Capitol Hill is that the White House will not budge on linking Medicare and Social Security to the fiscal cliff talks and thus Republicans will seek a ledge off the cliff and concede to President Obama’s wishes to raise the top tax rates and leave the rest for 2013. In this scenario then tax reform will be front and center with corporate taxes taking center stage, triggering a debate between a territorial v. global corporate tax code.
With the negotiations squarely around taxes, that leaves sequestration to kick in on January 1st. This places the Pentagon front and center at a moment when a new Defense Secretary will be nominated to replace DefSec Penetta. Former Senator Chuck Hagel (D-NE) is the likely nominee now that Sen. John Kerry (D-MA) is expected to be nominated to be Secretary of State. Hagel is a no-nonsense moderate Republicans and combat veteran with a steadfast opinion that the Department of Defense is bloated. Hagel would likely experience a smooth confirmation process but will face tough questions over his opposition to military strikes against Iran, preferring diplomacy.
The maximum sequestration defense cuts could total $1 trillion over ten years, roughly $500 billion more than those mandated by the Budget Control Act of 2011. Among the most effected companies are: Lockheed Martin (termination of the Joint Strike Fighter and it littoral combat ship), Boeing (terminated refueling tanker contracts) and General Dynamics (termination of its littoral combat ship and ballistic missile submarine). Also significantly affected will be companies that provide modernization of ground combat vehicles and Army helicopters.
Take Note! TransPacific Partnership, this issue makes for an interesting alignment between progressives and Tea Partiers. Progressives dislike it for the impact on labor organizing and the conservatives are distrustful over sovereignty issues (judicial jurisdiction). Progressives will work vociferously to derail TPP. The US Trade Representative is keen on getting this trade agreement before the 113th Congress with fast track authority. Assume TPP will be granted fast track but then undergo revision specific to certain producers. US textile and apparel manufacturers, sugar producers and fisheries will claim harm by TPP and their lobbyist will work feverishly for carve-outs.

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