Hassett and Zandi's comments followed another week of posturing as leaders from both parties blasted the other for failing to offer a serious plan, and the Office of Management and Budget began directing federal agencies to begin to plan for the impact of the potential spending cuts.
In the meantime, the showdown over the fiscal cliff is beginning to bleed into the next major fight in Washington, as the government will again reach its borrowing limit early next year. In his initial proposal, Obama suggested that Congress cede its authority over raising the debt ceiling to avoid a repeat of the standoff that played out last summer, when the ratings agency Standard & Poor's downgraded U.S. debt and markets lurched through a period of high volatility.
Senate Minority Leader Mitch McConnell (R-Ky.) rejected that proposal out of hand.
"Look: the only way we ever cut spending around here is by using the debate over the debt limit to do it. Now the president wants to remove that spur to cut altogether. It gets in the way of his spending plans," McConnell said Thursday on the floor of the Senate. "I assure you: it's not going to happen."
(In a bit of political maneuvering, McConnell proposed a vote on Obama's debt ceiling plan, likely expecting Reid not to comply for fear of subjecting vulnerable Democrats to a tough vote. But when Reid offered to bring the bill to the floor on Thursday, McConnell blocked debate with a filibuster.)
There is broad agreement that the uncertainty over the spending cuts and tax-rate fluctuations involved with the fiscal cliff and the concern that the United States could default on its debt payments if the borrowing limit is not increased is a drag on markets and consumer confidence. Zandi is quick to add that a long-term plan for fiscal responsibility that includes reforms to the tax code and entitlement programs must also be part of the solution.
But with a Dec. 31 deadline, time is running short, especially for the sort of grand bargain that Zandi sees as necessary. Asked whether that could be accomplished by the end of the year, Zandi replied, "No. I'm skeptical. But I do think it can be done before -- early next year before it does significant economic damage."
But it won't be too long into 2013 without a deal before things get serious, he warned.
"I think you could go into early February," Zandi told lawmakers. "By early February if it looks like you're not coming to a deal, and the market investors begin to discount the likelihood that you're not coming to a deal, then you'll see stock prices decline, the bond market will react, consumer and confidence will begin to erode. By mid-February it would be doing a lot of damage, and by the end of February, of course, then the debt ceiling again. You can't navigate around the debt ceiling and really bad things will happen. So I think you've got about a month."
