Milton Ezrati of Lord AbbettBattle lines have begun to form around the fiscal cliff. They will, of course, shift and waver in coming weeks. That is the nature of negotiations. In the process, financial markets will alternately suffer bouts of fear and relief. In all likelihood, the give-and-take will go on until the last possible minute. That, too, is the nature of such negotiations. But for all the doubts that will occur in the interim, it's likely that in the end, the talks and maneuvers will keep the nation from going off the cliff. The exact nature of coming compromises remains vague, but the positioning to date gives at least a hint.

The feeling at the moment is that the Democrats have the advantage. The election, after all, put President Obama back into the White House, modestly enlarged the party's Senate majority and gave Democrats small gains in the House of Representatives. But Republicans retain a solid majority in the House and have the ability to block legislation in the Senate. Especially since there is dissension within the two parties, neither side has the power to impose its will on the other. What is more, both sides face tremendous pressure to compromise. If each party hopes that the public would blame the other for failure, the prospect of a recession, which would almost certainly accompany a fall off the cliff, simply carries too much risk for most politicians. Even such tough partisans as Senate Majority Leader Harry Reid, D-Nev., and House Minority Leader Nancy Pelosi, D-Calif., have bowed to the imperatives of the moment and begun to talk in terms of "grand bargains" and "compromise." Pelosi says bluntly, "We want agreement," while Reid decries "brinkmanship."

The biggest issue is the expiration of the Bush tax rates. Republicans want to extend the lower rates for all. President Obama and the left of the Democratic Party insist on keeping the rates low for all but higher-income earners. The president points to the election to claim that the majority of the public is on his side. He has a point, but it is not all his way. At least one-third of the House Republican caucus has pledged never to raise tax rates on anyone. Obama knows his election victory means little to these representatives. Their political careers would end if they broke their vow. Their seeming intransigence raises the risk of failure should the president stand firm on his point, and the president knows that failure would impose considerable pain on his constituents. Taxes would rise on the middle class as well as the wealthy. Non-defense discretionary spending would suffer more than $50 billion in cuts. Extended unemployment benefits would end suddenly, and the burden of the alternative minimum tax (AMT) would be imposed on much of the middle class. Medicare services would be weakened as a scheduled 27% cut in doctors' fees would prompt many doctors to exit the program.

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