We asked private equity executives at our mid-November Buyouts Texas conference what they thought about the looming deadline, the possibility of a grand bargain, and whether Democrats or Republicans have the upper hand in forthcoming negotiations.
Howard Newman, Chief Executive, Pine Brook Partners
You can resolve the fiscal cliff without dealing with any of the main issues. You can resolve it by just maintaining the status quo, kicking it down the road and leaving it to the next Congress. So the fiscal cliff can be resolved with no pain, but resolving it won’t resolve our nation’s fiscal problems. The issue is whether you address the short and long-term issues of the economy.
The fiscal problem, which is different from the fiscal cliff, is that the level of government spending exceeds the economy’s ability to generate economic growth. The long-term fiscal problem is that my generation extracted promises on our behalf and stuck later generations with the bill without giving younger generations the income-generating capacity to meet those promises without reducing their standard of living. The intermediate-term fiscal problem is with the current level of government expenditures. Instead of paying taxes today to pay for these expenditures, we borrow, which increases taxes in the future. We don’t recognize that borrowing is also a tax increase.
So, do I think we will solve the fiscal problem when we solve the fiscal cliff? Absolutely not. Simpson-Bowles was a good attempt to address the fiscal problem and it did many good things. But the main issue is that we don’t generate enough income. Redistributing income won’t solve that problem, and thus the long term solution is to generate growth. If you generate growth, you can meet many of these promises.
George Kelly, Chief Executive, CapStreet Group
I don’t think anything will happen to resolve the fiscal cliff before the year ends. My guess is that this will get resolved sometime next year, or deferred for another year. Ultimately, I think carried interest will become regular income.
The two parties and the president are farther apart that their public statements indicate. Some of the reasons for this are the massive cuts in spending, which we’ll need to do, as well as increases in revenue, which we also need to do.
Matt Mitchell, Director, Champlain Advisors
There will be a bunch of posturing, a bunch of rhetoric, as we’ve already seen with House Speaker John Boehner putting a line in the sand and Obama saying that he’s not going to budge. So the most likely outcome is another short-term bridge, with Congress doing what it usually does—delaying the decision and pushing back the deadline.
But I don’t think we will go over the fiscal cliff. We will keep everything basically as it currently is and extend the Bush tax cuts for another six to 12 months, and then come to some other solution. But I still don’t see that ultimate solution entailing any significant tax increases. They’ll find revenue elsewhere by closing loopholes. The biggest sticking point is obviously increased taxes on families making more than $250,000. I think there’s a chance that Republicans will agree to that, but they will want to raise that threshold to families earning $500,000 or $1 million.
At the end of the day, this will be resolved. It has to be. The alternative is too politically damaging. Not resolving the fiscal cliff is just outside the realm of possibility.
Spencer Fleischer, President, Friedman Fleischer & Lowe
I think there will be a compromise that will involve higher taxes on wealthy people, but I’m optimistic that there will also be some long-term changes to entitlements that are less painful and less immediate, but important. The critical question is whether those changes will stick, and I think they will. I think the fiscal cliff is just the first step of a long battle.
As for the deadline, I think we’ll punt and then have a big debate after the new Congress comes in. In the end, I think Obama may get his wish on the top tax rate. He will win the bluff calling on the top tax rate unless we go off the cliff. The question is: if we go off the cliff, who gets the blame?
In the end, I think they’ll create enough room to come up with a kind of grand bargain.
Edited by Greg Roth for clarity