A politician counting money in front of the US Capitol Building © Antenna, fStop, Getty Images

The yard signs have come down. The political ads have mercifully stopped. And now, the task turns from campaigning to governing and compromise.

The "fiscal cliff" of tax hikes and spending cuts worth $720 billion, or 5% of gross domestic product, threatens on Jan. 1. Just beyond that, we have to contend with the Treasury's debt limit -- and the tussle over raising it last time nearly torpedoed the economy in August 2011. To focus the mind even more, we also have the threats of credit rating downgrades, further loss of CEO confidence and a potential new recession.

The ugliness of our politics hit a new nadir this year as President Barack Obama's message of hope and change devolved into character attacks while Republicans focused on the makers versus the takers, the 47%, and so on. The focus was on things like Mitt Romney's tax returns, binders of women, and horses and bayonets. For the next step, we need the old Obama back -- the one who talked of post-partisanship, kept Republicans in his Cabinet and seemed more interested in results than ideological purity -- to navigate the fiscal cliff that has markets and businesses so worried. (See what's in the fiscal cliff.)

Republicans, against all odds and in a reversal of the post-2010 Tea Party ascendance, seem ready to strike a deal. And if it happens, the market will surge.

The change we need

As I've said in recent columns and blog posts, including "Obama, GOP face off at the edge," the stakes couldn't be higher. Businesses have pulled back and capital expenditures are dropping at a pace not seen since the 2008 meltdown because uncertainty about Washington is so high. Analysts at Société Générale estimate that, since 2007, political bickering has shaved 2.5% from GDP and resulted in 2.1 million lost jobs.

In dollar terms, that's nearly $400 billion in lost output and wages for average Americans.

Yet despite this, and despite that $6 billion spent on some 1.2 million political ads, the electorate largely returned the status quo to power in Washington. Obama lost a few states in the Electoral College. Republicans lost a few seats in Congress. But Americans are sending the same group back, ostensibly with the wish that a compromise is found.

Thankfully, with a demographic wave working against them, Republicans have changed their tack. They could be realizing that obstructionism -- deployed since the 2010 midterms -- and their commitment to Grover Norquist's Taxpayer Protection Pledge are failing.

Yes to new taxes?

The key to unlocking a bipartisan deal is taxes.

House Speaker John Boehner R-Ohio kicked off the wave by saying that this was the president's moment to succeed and that Republicans would be willing to accept new taxes -- if they came from tax reforms and a reduction in credits and deductions rather than increases in marginal tax rates. This would raise revenues but do so in a way that wouldn't further damage business confidence, because a simpler tax code would reduce compliance costs and end-of-year headaches.

If we're talking about replacing the revenue from ending the so-called Bush tax cuts on the wealthy, then only around $60 billion per year is needed -- and that is doable, according to research from the Tax Policy Center (.pdf file). Conservatives are falling over themselves to walk through the opening made by Boehner and to support a tax idea originally pushed by Obama as well as his 2010 Simpson-Bowles deficit committee.

Rep. Paul Ryan, R-Wis., the GOP's vice-presidential candidate, has come out in support of the revenues-via-reform idea as he prepares to return to his post as House Budget Committee chairman to play a key role in the coming fiscal cliff negotiations.

Glenn Hubbard, Romney's economic adviser, wrote in the Financial Times that to avoid the fiscal cliff, we need to raise average tax rates through revenue-via-reform instead of simply raising marginal rates -- something that will "distort behavior and reduce activity." For the rich, popular deductions on things like mortgage interest, charitable giving and health insurance should be on the table.

And Weekly Standard editor Bill Kristol wondered why Republicans haven't been willing to negotiate with the president on taxes. Appearing on Fox News Sunday, he said: "The Republican Party is gonna fall on its sword to defend a bunch of millionaires, half of whom voted Democratic, and half of whom live in Hollywood and are hostile to Republicans."

Obama, in his postelection speech, emphasized the need for the wealthy to pay a little more. The revenues-via-reform idea gives him that. But we cannot solve the fiscal cliff merely by raising taxes, since the real, long-term driver of the deficit is unfunded entitlement programs going broke because of out-of-control health care costs.

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Two sides of the coin

As I've said before, the deficit isn't just about taxes and spending. It's about short term versus long term and cyclical versus structural.

There is the short-term, cyclical deficit (caused by our middling economy) that results in more spending on things like disability benefits and food stamps and which lowers tax revenues, since the employment-to-population ratio is at early 1980s levels.