At Republican Retreat, Ryan Urges Unity on Fiscal Issues

WILLIAMSBURG, Va. — As House Republicans hunkered down here for a two-day retreat to discuss the future of their conference, Representative Paul D. Ryan of Wisconsin warned members that they had to “recognize the realities of the divided government that we have” and urged members to unite behind leadership on the coming fiscal debates.

Mr. Ryan, the chairman of the budget committee, told reporters that he thought some of the divisiveness that had plagued House Republicans under the leadership of Speaker John A. Boehner would most likely subside once members understand the coming battles and challenges.

“I think what matters most is people have a very clear view of what’s coming so that there are no surprises, and that means setting expectations accordingly, so that we can proceed in a unified basis,” Mr. Ryan said. “And the reason we’re doing this kind of facilitation right now is we want every member to understand all of the issues and all of the consequences, so that we can come together with consensus on a plan and move forward and proceed.”

Referring to the end of the previous Congress, which left the House, the Senate and the White House racing against a deadline to pass legislation to offset across-the-board tax increases and spending cuts needed to avert a financial crisis, he added, “We have the time to do that, whereas before it was a little more rushed, and we didn’t have the time.”

The former vice presidential candidate has maintained a low profile since returning to Congress, but he surprised some when he voted with Mr. Boehner on the tax deal devised by the White House and Senate Republicans to avert the so-called fiscal cliff.

Mr. Ryan also signaled that his conference might be flexible when it comes to the coming debate about the debt limit.

“We’re discussing the possible virtue of a short-term debt limit extension so that we have a better chance of getting the Senate and White House involved in discussions in March,” he said.

But reining in outsize spending and a soaring deficit still remains a top Republican priority, Mr. Ryan emphasized.

“We think the worst thing for the economy for this Congress and this administration would be to do nothing to get our debt and deficits under control,” he said. “We think the worst thing for the economy is to move past these events that are occurring with no progress made on the debt and deficits.”

He added: “We know we have a debt crisis coming. This is not an ‘if’ question, it’s a ‘when’ question.”

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Fiscal compromise and broken promises

WASHINGTON — WASHINGTON In a town of broken politics, the path to compromise is littered with broken promises. It's called governing.

The rush to avoid economic calamity on Jan. 1 has President Barack Obama and House Speaker John Boehner out to cut a deal and sell it to their parties. The goal is a middle ground that would at least halt looming tax increases on virtually everyone, if not yield a far-reaching bargain to stabilize the nation's debt.

Yet, the political compromise the public wants is smashing into another political force -- the so-called iron-clad promises made to that same voting public.

Days after he won a second term, a beaming Obama reminded everyone about a defining promise of his re-election: The wealthy must pay more to help shrink the nation's ballooning debt. He insisted he would not go for a deal in which families making more than $250,000 are "not asked to pay a dime more in taxes."

Except now he would do that.

To get a fiscal deal with Republicans, Obama raised his bottom line to people making $400,000 or more. He is also now willing to raise taxes on the middle class by agreeing to let a payroll tax cut expire -- and by accepting a new inflation index that would, in addition to shrinking yearly increases for Social Security beneficiaries, push people into higher tax brackets.

Instead of holding firm on his oft-repeated pledge to raise taxes on the top 2 percent of taxpayers, Obama's plan would hit less than the top 1 percent.

And then there's Boehner.

He said Republicans were willing to consider tax revenue, but not by raising tax rates on anyone. "Instead of raising tax rates on the American people and accepting the damage it will do to our economy, let's start to actually solve the problem," Boehner said after the election.

And now? Boehner is willing to let tax rates go up on Jan. 1, as long as it is only on people making over $1 million and that other parts of the deal fall into place. The part about damage to the economy for raising taxes on anyone, including the richest people, has disappeared.

In the hardest of political times, the hardest of lines tend to fall away.

"That's the reality of Washington. You don't get exactly what you want, but you do it for the benefit of the country," said Jim Kessler, senior vice president of Third Way, a think tank that advocates for the middle ground in American politics.

The group's surveys find what so many polls have shown -- people want Democrats and Republicans to compromise. They want Washington to work.

Obama and Boehner know this. They are figuring out how far they can go without alienating voters or putting together a deal that has no chance of passing.

And they are bending or breaking promises, provided they can justify the broader result and claim they are not abandoning their principles.

The president can still say he would be extracting more tax revenue from the rich while preserving tax rates on families making $250,000 or less.

The White House dismissed the broken-promise label. Obama "has demonstrated a willingness to move towards the Republicans in order to achieve a deal," White House press secretary Jay Carney said.

Boehner is faced with tax rates going up on everyone regardless on Jan. 1. So by shifting his stand on tax rates, he is at least poised to get something out of it, including deeper spending cuts and a commitment to tax reform in 2013.

If a deal comes together.

Meanwhile, both leaders have to hold off the flanks of their parties.

Rep. Jim Jordan, of Ohio, the outgoing chairman of the conservative Republican Study Committee, said Boehner's plan crosses a dangerous line by enacting higher tax rates. "I think it's a mistake for the Republican Party, so that's what I think a lot of members are struggling with," Jordan said.

Liberal groups denounced the White House's inclusion of a different inflation index for benefit programs like Social Security that would cut average retiree benefits. It was the White House, they point out, that suggested Social Security should not be included in the negotiations because it does not drive up the federal deficit.

"He's breaking a pledge that he would not cut benefits," said Eric Kingson, founding co-director of Social Security Works and a co-chair of the Strengthen Social Security Coalition. "You can change the language, but people aren't fools. It's a cut."

The White House said any changes would include protections for the most vulnerable beneficiaries.

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Business Fears the Fiscal Cliff

As Nelson Schwartz reported in The Times on Monday, a number of manufacturers say they are canceling plans for investing and hiring, in part, because they fear that some $100 billion in budget cuts will take effect in 2013. In all, the law currently calls for $1.2 trillion in automatic spending cuts over 10 years, starting Jan. 1, divided between nondefense programs and defense projects.

Republican lawmakers demanded the cuts last year as part of their brinkmanship over the debt ceiling, and business lobbies have generally supported slashing the deficit. But now that the cuts are imminent, corporate executives seem to have realized that the last thing the economy needs is a large budget cut across the board.

They’re right about that. According to the Congressional Budget Office, the combined impact of the automatic spending cuts plus the scheduled expiration of the Bush-era tax cuts — the so-called fiscal cliff — would cause the economy to contract in the first half of 2013. Some business leaders seem to think the solution is for Congress to act as soon as possible to avert the spending cuts and to extend all of the tax cuts. That would avoid an economic downturn next year, but it would also mean no progress toward long-term deficit reduction.

The best approach is to delay the blow of lower federal spending, thus shielding businesses from a sudden drop in support, and, at the same time, temporarily extend the Bush-era tax cuts for most Americans and let them expire for those making more than $250,000 a year, as President Obama has proposed. That would raise revenue and be a credible step toward long-term deficit reduction, without harming the recovery, because high-end tax increases do not cut deeply into consumer spending.

Politically, such a deal can probably be struck only in 2013, after the spending cuts have kicked in and the tax cuts have expired, assuming Mr. Obama wins re-election. Republican lawmakers, confronting the consequences of the spending cuts, would have to come to the conclusion that delaying both defense and nondefense spending cuts would be best for today’s economy. As for the tax cuts, letting them all expire could pressure Republicans to renew them for the middle class, while letting them end for the rich.

That is crucial because higher taxes for top earners is necessary for the nation to begin to raise the revenue it needs. And until the rich pay more, there will never be a national consensus for tax increases on middle-income Americans, which will eventually be needed to further curb long-term deficits.

Even business leaders are starting to complain. Now it is up to Democrats to force Republicans to rework the coming spending cuts and tax increases in a way that benefits most Americans and the broader economy.

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Fear of ‘Fiscal Cliff’ Has Industry Pulling Back

Executives at companies making everything from electrical components and power systems to automotive parts say the fiscal stalemate is prompting them to pull back now, rather than wait for a possible resolution to the deadlock on Capitol Hill.

Democrats and Republicans are far apart on how to extend the Bush-era tax breaks beyond January — the same month automatic spending reductions are set to take effect — unless there is a deal to trim the deficit. The combination of tax increases and spending cuts is creating an economic threat called “the fiscal cliff” by Ben S. Bernanke, chairman of the Federal Reserve.

Until recently, the loudest warnings about the economy have come from policy makers and economists, along with military industry executives who rely heavily on the Pentagon’s largess and who would be hurt by the government reductions.

But more diversified companies like Hubbell Inc. in Shelton, Conn., have begun to hunker down as well.

Hubbell, a maker of electrical products, has canceled several million dollars’ worth of equipment orders and delayed long-planned factory upgrades in the last few months, said Timothy H. Powers, the company’s chief executive. It has also held off hiring workers for about 100 positions that would otherwise have been filled, he said.

“The fiscal cliff is the primary driver of uncertainty, and a person in my position is going to make a decision to postpone hiring and investments,” Mr. Powers said. “We can see it in our order patterns, and customers are delaying. We don’t have to get to the edge of the cliff before the damage is done.”

The worries come amid broader fears that the economy is losing momentum — the annual rate of economic growth in the second quarter fell to 1.5 percent from 2 percent in the first quarter, and 4.1 percent in the last quarter of 2011.

On Thursday, the Commerce Department reported that factory orders unexpectedly fell 0.5 percent in June from the previous month, while data on the labor market released Friday showed job creation still falling short of the level needed to bring down the unemployment rate.

All told, the political gridlock in the United States, along with the continuing debt crisis in Europe, will shave about half a percentage point off growth in the second half of the year, estimates Vincent Reinhart, chief United States economist at Morgan Stanley.

More than 40 percent of companies surveyed by Morgan Stanley in July cited the fiscal cliff as a major reason for their spending restraint, Mr. Reinhart said. He expects that portion to rise when the poll is repeated this month.

“Economists generally overstate the effects of uncertainty on spending, but in this case it does seem to be significant,” he added. “It’s at the macro- and microeconomic levels.”

Unless Congress acts to extend the tax provisions and comes up with a budget deal that averts the planned reductions in military spending and other government programs, taxes will rise by $399 billion while federal government spending will fall by more than $100 billion, according to an analysis by the Congressional Budget Office. The end-of-year battle comes after Democrats and Republicans have failed over the last year to reach long-term agreements on how to tackle the budget deficit.

Last week, Congressional leaders did manage to agree tentatively to keep the government financed through next March, extending a deadline that had been set to expire Oct. 1, but that deal did not address the extension of the tax cuts or spending reductions.

All together, the fiscal cliff’s total impact equals slightly more than $600 billion, or 4 percent of gross domestic product, and if no action is taken, the Congressional Budget Office projects the economy will shrink by 1.3 percent in the first half of 2013 as a result.

With many Fortune 500 companies now setting budgets and planning for 2013, chief executives say they cannot afford to hope for the best. Wall Street is also paying more attention: over the last few weeks, chief executives of companies like Honeywell, U.P.S. and Eaton all cited the uncertainty as a threat to earnings in the second half of 2012.

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