U.S. edges dangerously close to “fiscal cliff” before deadline

by Matthew Rusling – China View Dec 30, 2012

U.S. President Barack Obama and Congress had still not come to an agreement on the “fiscal cliff” Sunday, pushing the economy near the edge and risking another recession.

The two sides have until midnight Dec. 31 to reach an agreement to avoid the default sweeping tax hikes and spending cuts due to start in the New Year, and which economists fear will send the U.S. back into recession.

At issue is whether the president and Republicans can hammer out an agreement on tax increases for higher earners and whether the president can deliver the spending cuts Republicans want.

Appearing Sunday on NBC’s “Meet the Press,” Obama blamed Republicans for the lack of progress on the talks, arguing they “have trouble saying yes.”

“They say that their biggest priority is making sure that we deal with the deficit in a serious way, but the way they’re behaving is that their only priority is making sure that tax breaks for the wealthiest Americans are protected,” Obama said.

Republicans countered that higher taxes on any tax bracket will further stunt the weak economy, adding Obama had put forth no serious proposals to cut Washington’s massive spending.

Republican Sen. Lindsey Graham expressed hope Sunday some sort of deal would be reached before Monday’s midnight deadline, saying the chances were “exceedingly good” that a deal would get done.

“I think people don’t want to go over the cliff if we can avoid it,” he told Fox News Sunday, forecasting the GOP would accept some level of tax hikes.

Barry Bosworth, senior fellow at the Brookings Institution and a former presidential adviser, said a fall off the “fiscal cliff” would trigger a relatively modest recession.

The Congressional Budget Office had projected the unemployment rate would rise to 9 percent — it was 7.7 percent in November — and the decline in GDP over four quarters would be about 0.5 percent, Bosworth said.

The full tax hike would amount to about 500 billion dollars, he said, adding the impact would hit in the first quarter of 2013 and peak in the second half of the year.

Consumers would begin to react in the first quarter, although much of that would be reversed in future quarters if Congress cut an after-deadline deal at the start of 2013, Bosworth said.

Failure to reach a deal could mean the loss of nearly 300,000 federal jobs, according to a George Mason University study, and economists predict the loss of scores of private sector jobs should Congress and the White House fail to act.

Those who keep their jobs would still feel the sting, and one figure bandied about in the U.S. media indicates a family earning 50,000 to 75,000 dollars a year could see tax hikes of more than 2,000 dollars next year. The Tax Policy Center found nearly 90 percent of households would be affected if a deal was not reached.

Whether or not Obama makes a deal with lawmakers, fear of the “fiscal cliff” has already damaged the world’s largest economy as it struggles toward recovery.

Scott Nystrom, associate economist at Regional Economic Models Inc., said the economy had been sliding in the past few months, not only because of the uncertainty that is typical in any election year, but also because of uneasiness over the “fiscal cliff.”

Some companies have put contracts on hold due to the uncertainty, he said, and households were unsure what taxes they might have to pay next year, causing them to tighten their belts in an economy driven by consumer spending.