By any measure the outgoing 112th Congress is the most polarised in modern US history. Yet Republican and Democratic leaders are doing a surprisingly good job of seeming as though they might turn away from the fiscal cliff. Last week’s Oval Office meeting brought signs that Mitch McConnell, the Republican Senate leader, is prepared to get along with Barack Obama. Even the diehards see a downside in being blamed for a self-inflicted recession.
There are two reasons to remain vigilant as Washington inches towards a possible compromise.
First, the US recovery remains tepid. Any action to avoid the cliff will involve some spending cuts and some tax increases – although far lower than the roughly $500bn that would result from the current policy course. Any tax increase would be confined to the top 2 per cent, which would not be sharply contractionary. However, it is vital that Congress extend the temporary payroll cut and unemployment insurance, which also expire at the end of year. Both have a big impact on demand.