In Washington, uncertainty the only sure thing

WASHINGTON Fri Jun 22, 2012 3:08pm EDT

A view of the U.S. Capitol building during sunset from Pennsylvania Avenue in Washington February 5, 2012. REUTERS/Jose Luis Magana

A view of the U.S. Capitol building during sunset from Pennsylvania Avenue in Washington February 5, 2012.

Credit: Reuters/Jose Luis Magana

WASHINGTON (Reuters) - The tepid U.S. recovery is stalling for the third summer in a row, and Washington yet again is hurtling toward a showdown over taxes and spending that could push the economy back into recession.

Sound familiar? To weary voters and investors, dysfunction in Washington is no longer news. The ongoing uncertainty on everything from taxes to transportation has undercut the economy as battle lines harden ahead of what is sure to be the most expensive presidential election in history.

The Reuters Washington Summit next week, from June 25 to 27, will shed light on how the coming months could play out. In interviews at the Reuters office in Washington, key lawmakers, campaign officials, political operators and budget analysts will offer insight into their strategies for navigating the coming turbulence.

The November 6 matchup between Democratic President Barack Obama and his Republican challenger, Mitt Romney, could determine whether the United States chooses new stimulus programs or further spending cuts in the years ahead. The elections could determine which party controls Congress as well.

But the elections are not the only question mark.

Thousands of construction workers could be laid off if Congress does not resolve a highway funding bill by the end of the month. Student loan rates are also due to double on July 1 if Congress does not act, potentially draining more money out of the economy.

More threatening is the "fiscal cliff" - automatic spending cuts and tax hikes that could drag the economy back into recession in January if Democrats and Republicans do not strike a deal on taxes and debt reduction.

And the ugly debate over whether to raise the federal debt ceiling, which hammered consumer confidence last summer and prompted a first-ever downgrade of the U.S. government's debt rating, is likely to return early next year.

"This uncertainty leads firms to cut back or defer hiring and investment decisions. It also drives consumers to put off buying new goods. As a result, uncertainty stalls both the corporate and consumer sector drivers of a recovery," wrote Steven J. Davis of the University of Chicago and Nick Bloom and Scott Baker of Stanford University.

The trio's "policy uncertainty" index is creeping back up toward levels last seen after the August 2011 debt ceiling showdown.

'AS BROKEN AS IT EVER HAS BEEN'

Obama won election in 2008 on a theme of "hope and change," promising to close the political gulf between conservatives and liberals. This time around, the message won't be nearly as uplifting.

Obama pivoted to a confrontational stance after Republicans offered little support for his measures to boost the economy, police Wall Street and fix a broken healthcare system.

He now frames his re-election battle against Romney as a choice between Democratic policies that would boost the middle class and Republican policies that would benefit the wealthy.

"Did he change Washington or did Washington change him?" Jim Manley, a former top aide to Senate Democratic Leader Harry Reid, said of Obama. "He certainly didn't change Washington - the place is as broken as it ever has been."

Obama's campaign managers have spent the past two months hammering Romney's record as a private-equity executive and governor of Massachusetts. They expect Republicans to respond with more than $1 billion in negative TV ads as they take advantage of loosened campaign-finance rules.

Obama tells voters that only they can break the stalemate in Washington. Victory for his Democrats could signal a new round of fiscal stimulus, tax hikes on the wealthy and additional spending on domestic programs such as education and scientific research. A win by Romney could usher in new tax cuts and sharp cuts to domestic spending.

The White House isn't the only prize up for grabs on November 6. Republicans stand a good chance of winning control of the Senate and retaining their hold on the House of Representatives. Democrats face a steeper climb as they try to take back the House and retain the Senate.

Lawmakers have much work to do before they hit the campaign trail. Congress will have to act to keep transportation money flowing and to prevent student loan rates from increasing, avoiding the possibility of a double blow to the economy.

The Supreme Court also is expected to render a verdict on Obama's healthcare overhaul, which included a requirement that nearly all Americans buy health insurance. If the court strikes down the law, Republicans will be under pressure to outline their vision for fixing the healthcare system - and keep their elation in check.

"If the court strikes down all or part of the president's healthcare law, there will be no spiking of the ball," House Speaker John Boehner wrote to his fellow Republican lawmakers, warning them not to celebrate such a ruling.

The heaviest lifting likely will take place after the election. Steep tax increases and spending cuts equal to about 4 percent of the U.S. economy will take effect on January 1 unless Congress acts before then.

The "fiscal cliff" could push the economy back into recession. Lawmakers could use the deadline to simplify the nation's loophole-ridden tax code and set the nation's finances on a sustainable path, but analysts don't expect that to happen.

"Congress will muddle through as it usually does, doing the bare minimum to avoid a catastrophe, but otherwise kicking the can down the road on important decisions," analyst James Lucier of Capital Alpha Partners wrote in a research note.

Follow Reuters Summits on Twitter @Reuters_Summits

(Editing by David Lindsey and Anthony Boadle)