View from cliff could be scary

Posted: December 31, 2012

EFFORTS TO SAVE the nation from going over a year-end "fiscal cliff" were still in disarray as lawmakers returned to the Capitol to confront the tax-and-spend crisis. A tone-setting quotation was Democratic Sen. Harry Reid's assertion that the House under Republican Speaker John Boehner had been "operating with a dictatorship."

President Obama flew back to Washington from Hawaii after telephoning congressional leaders from his Christmas-vacation perch. Once back, he set up a meeting with leaders of both parties at the White House late Friday to make a fresh attempt to find a solution before Monday night's deadline.

Here's the situation:

New Year's headache

Partly by fate, partly by design, some scary fiscal forces come together at the start of 2013 unless Congress and Obama act to stop them. They include:

* About $536 billion in tax increases, touching nearly all Americans, because various federal-tax cuts and breaks expire at year's end.

* About $110 billion in spending cuts divided equally between the military and most other federal departments. That's about 8 percent of their annual budgets, 9 percent for the Pentagon.

Hitting the national economy with that double whammy of tax increases and spending cuts is what's called going over the "fiscal cliff." If allowed to unfold over 2013, it would lead to recession, a big jump in unemployment and financial-market turmoil, economists predict.

What if deadline passes?

If New Year's Day arrives without a deal, the nation shouldn't plunge onto the shoals of recession. There still might be time to engineer a soft landing.

As long as lawmakers and the president appear to be working toward agreement, the tax hikes and spending cuts could be held at bay for a few weeks. Then they could be repealed retroactively once a deal was reached.

The big wild card is the stock market and the nation's financial confidence: Would traders panic if Washington appeared unable to reach accord? Would worried consumers and businesses sharply reduce spending? In what could be a preview, stock prices in the U.S. and Europe dropped Friday on waning hopes that Obama and lawmakers would reach an 11th-hour compromise.

Federal Reserve Chairman Ben Bernanke has warned lawmakers that the economy is suffering from uncertainty and that they shouldn't risk making it worse by blowing past their deadline.

And if they never agree?

If talks between Obama and Congress fail, 2013 looks rocky.

Taxes would jump $2,400 on average for families with incomes of $50,000 to $75,000, according to a study by the nonpartisan Tax Policy Center. Because consumers would get less of their paychecks to spend, businesses and jobs would suffer.

Americans would feel cuts in government services; some federal workers would be furloughed or laid off and companies would lose government business. The nation would lose up to 3.4 million jobs, the Congressional Budget Office predicts.

"The consequences of that would be felt by everybody," Bernanke said.

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