With the election over, voters can take a deep breath. But they had better make it quick. Now the "fiscal cliff" looms. And we're all headed off it if something doesn’t happen quick.
The path to the cliff was fixed in July 2011, when a debt-limit crisis was averted through a compromise that came with a time bomb whose fuse has now nearly run out.
If Congress cannot forge a compromise by Jan. 1, federal spending will be slashed by $109 billion a year. Half the cuts will hit the defense budget, which will, warns Defense Secretary Leon Panetta, “hollow out the military.”
Meanwhile, taxes will jump across the board. Ninety percent of Americans will see their taxes go up, with those in middle-income brackets facing hikes of roughly $2,000 a year, according to a report by the Tax Policy Center.
Plunging suddenly over this cliff could be catastrophic, almost all analysts agree, tipping the economy into a new recession.
“The short term is harrowing and scary. It’s a big deal,” said Lisa Emsbo-Mattingly, director of research for global asset allocations at Fidelity Asset Management.
But observers on all sides also agree that it is time to actually fix the fiscal mess, not paper it over once again. Some are seizing the moment to generate public pressure for tough fiscal solutions, but there is still huge distance between the left and right on solutions.
Game of chicken
The 2011 debt-limit deal allowed the government to raise the debt ceiling another $2.4 trillion. In exchange, $900 billion in spending cuts would be spread over 10 years. But the poison pill was that a congressional task force would be required to find an additional $1.2 trillion in deficit reductions over those 10 years.
Unless President Barack Obama and Congress agree to an alternative by Jan. 1, 2013, the U.S. will jump the cliff.
All Bush-era tax cuts will expire. Taxes in all brackets will jump, as would corporate and estate taxes. Spending will be slashed, with half the cuts hitting defense.
All this will happen automatically. In beltway jargon, these arbitrary cuts are called "the sequester," while the whole package of tax hikes and cuts is "the cliff."
The path to cliff was smoothed by widespread agreement that neither side would actually let it happen.
When the idea was initially hatched back in 2011, Republicans were unwilling to agree to such a proposal. However, they eventually came around to the idea, reporter Bob Woodward wrote in his insider account of the Obama administration, titled "The Price of Politics."
Speaker of the House John Boehner (R-OH) "told the House Republican leadership and other key members not to worry about the sequester,” Woodward wrote. “‘Guys, this would be devastating to Defense,’” he said. “‘This would be devastating, from their perspective, on their domestic priorities. This is never going to happen."
But as the presidential contest wore on this fall, no hint of compromise surfaced. Insiders were surprised in the third presidential debate between Obama and Mitt Romney when Obama confidently stated that “the sequester is not something that I’ve proposed. It is something that Congress has proposed. It will not happen.”
Observers were surprised both because, according to Woodward’s unchallenged account, the Obama administration had proposed the sequester approach, and because nothing was yet in the works to avert it.
Meanwhile, the deadline has drawn ever closer. The scope of sequestration damage came into focus when the White House Office of Management and Budget in September outlined the likely impact of the cuts.
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