Believe it or Not, We’ve Now Got a Better Chance for Serious Policy Reform

Robin Anderson (Economist, Principal Global Investors) also contributed to this post.

With all the back and forth these days in the United States between Democrats and Republicans over the fiscal cliff, it’s hard to see any positives in what appears to be overly partisan wrangling; however, I would propose to you that, right now, we have a better chance for serious policy reform than we’ve had in recent history.

Now, I’m not saying that credible long-term tax and spending policy is the most likely outcome from these fiscal cliff negotiations, but I do believe that we now have an increased possibility of serious discussions that could set U.S. fiscal policy on the right path. The talking heads we all see on TV aren’t the harbingers of any positive changes that could come out of these negotiations; they’ve spent the last several years digging themselves in to a one-sided point of view that they now have to vigorously defend. No, I’m referring to the more thoughtful policy people in Washington who operate behind the scenes to do the nation’s business. Word is that these thoughtful policy makers are talking very actively about the developments around Simpson-Bowles and similar plans for solving the U.S. fiscal issues.

The back and forth between President Obama and House Speaker John Boehner hint at the discussions that are going on in private. It may seem like bickering, but it looks much more like compromise than what we’ve seen recently in Washington. To me, it seems like we’re definitely seeing some give among these more reflective policy makers to the idea that some sort of tax reform might actually be a constructive way to move, perhaps through removing some tax shelters or lowering rates and “broadening the base.”

The good news about the contentious elections and the tense atmosphere surrounding the fiscal cliff debate is that they’ve put U.S. politicians in a serious state of mind. Democrats have to have realized that a re-elected Republican majority in the House means that a decent portion of the country is concerned about “out of control” government spending. Similarly, Republicans should have recognized that a re-elected President Obama means that a majority of the electorate find favor with his policies on healthcare and taxation. Even if partisan bickering causes a slip off the edge of the fiscal cliff and a short recession in the first half of 2013, I suspect this would only increase the potential for serious tax reform.

If – and this is a big “if” – the government can negotiate some sort of credible policy reform in 2013, in my mind, this would be the impetus for an upside scenario and would set the U.S. economy up for a very fine 2014. It’s reasonable to assume that reforms to make the tax code more fair (while generating more revenue), and a carefully considered spending plan could set the U.S. economy on the path to 3.5% or 4% growth in 2014. If crises precipitate change, perhaps some good can come from the debate over the fiscal cliff.