The fiscal cliff: What happens if there’s no deal?

“Relax,” said Edward Krudy in Reuters.com. Falling off a “fiscal cliff” sounds like it would bring horrible—and possibly fatal—consequences. But fears that the nation will suddenly tumble into recession on Jan. 1 are overblown, even if Congress and the White House can’t make a deal to forestall the massive tax increases and spending cuts due to take effect that day. Contrary to what some doomsayers have predicted, income taxes won’t go up overnight, and $500 billion won’t suddenly be sucked out of the economy. If there’s no deal and the Bush tax cuts expire for all Americans, President Obama can order the Treasury Department to delay collecting any higher taxes for at least a few months. The Pentagon and other federal agencies facing automatic, 10 percent budget cuts can simply frontload their spending, and hope Obama and Congress strike a deal to restore some funding later. There would be some immediate effects of jumping off the cliff, said Michael Shear in The New York Times. The first paychecks of 2013 would shrink slightly, with the expiration of last year’s 2 percent payroll-tax cut. But much of the impact “would not be felt for months,” giving Washington a bit more time to come to its senses.

You’re forgetting the psychological impact, said The Baltimore Sun in an editorial. “Even a brief fall over the cliff could roil financial markets, sap business and consumer confidence, and send the economy back into recession.” Ominously, there are signs that both sides are no longer terrified by that prospect. President Obama may be encouraged to jump the cliff by new polls showing that, by a 2-to-1 margin, the public would blame congressional Republicans for any economic damage. House Speaker John Boehner, meanwhile, now faces a Tea Party rebellion if he acquiesces to Obama’s demand for higher tax rates on the top 2 percent of wage earners. “Watch out, folks, this could get bumpy.”

“The good news is that the fiscal cliff is really a fiscal slope,”said Joseph Lazzaro in the International Business Times.But the bad news is that if there’s still no deal by February or March, the stock and world markets will conclude that Washington is hopelessly gridlocked and cannot address the nation’s mounting debt problem. That would lead to another downgrade of the U.S. credit rating, a loss of investor confidence, and serious, long-term economic damage. To prove that the U.S. is sane and solvent, we need more than a limited deal on the top tax rate, said Clive Crook in Bloomberg.com. We need a “grand bargain” to reform and simplify the tax code, rein in entitlement spending, and put the country’s fiscal house in order. Anything less “wouldn’t dispel the confusion or get the economy growing.” Major U.S. companies are already scaling back their investments “at the fastest pace in three years,” out of trepidation about what may lie ahead.

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

Maybe “a little panic” in the financial markets is just what the doctor ordered, said Doyle McManus in the Los Angeles Times. Let’s face it: Neither Republicans nor Democrats will “compromise on deeply felt fiscal principles” until they have no other choice. That means no grand bargain addressing the larger spending and tax issues until the markets start freaking out and Americans are furious at both sides. “When have we ever seen Congress make a deal before its back was against the wall?”