Fiscal cliff approaches and concerns mount

Economists, budget hawks and business groups are growing more and more concerned that Washington will allow the nation to go over the fiscal cliff by doing nothing to prevent looming spending cuts and tax increases.

Earlier this year it seemed impossible that Congress could allow the nation to slip over the cliff, given predictions it could spark a new recession, and Federal Reserve Chairman Ben Bernanke has repeatedly warned lawmakers of dire economic consequences. 

In Monday’s debate, President Obama said automatic spending cuts would not happen.

Yet two weeks before a presidential election that is razor-close, there is new skepticism that any deal will be reached in lame-duck Washington. 

“The odds are high that we’ll have to go into next year to get a deal,” Mark Zandi, the chief economist at Moody’s Analytics, said in an interview Tuesday. 

“We’re increasingly concerned,” said Steve Bell, senior director of economic policy for the Bipartisan Policy Center. 

Lawmakers digging in their heels during a campaign, pressure on committee chairmen — who could face challenges in the lame-duck session — and a belief on both sides that the other will take more of the blame are adding to the sense that a deal won’t be found. 

The Congressional Budget Office estimates falling over the cliff would cause a recession. Unemployment would jump back over 9 percent while the economy would contract in the first half of the year by 2.9 percent. Goldman Sachs argues the cliff would take 4 points off the nation’s GDP. 

But it could take time for that to happen. 

Zandi argues the immediate effects on the economy of going over the cliff are “not cataclysmic.” 

“The economy won’t collapse,” he says, though the damage will build up over time. 

Still, Bell predicts a “serious negative reaction” on Wall Street. 

“In my view it would be extremely reckless to take the chance” of going over the cliff, he said. 

Both political parties would, of course, be taking an enormous risk in betting that the other side will get more of the blame if the nation goes over the cliff. And much depends on the presidential election. 

If Obama wins, Zandi argues, the clock will start ticking immediately on the cliff, with lawmakers having less than two months to get a deal. 

A recent story in New York magazine argued Obama should allow the nation to go over the cliff, contending he would then have more leverage with Republicans in a fight over extending taxes. 

There are those who think there could be advantages to going over the cliff, since it could force the government to come up with a long-term deficit-reduction plan. 

This is particularly true if Washington works quickly to either phase in higher taxes and spending cuts or approve some lower tax rates retroactively after Jan. 1. 

“It’s only the pressure of falling stock prices, rising taxes and spending cuts that will get people focused,” Zandi said. 

In a June paper, William Cline, a senior fellow with the Peterson Institute of International Economics, argued that to get its debt problem in order, the U.S. needed a structural fiscal adjustment of tax hikes and spending cuts amounting to 3 percent of GDP. 

He argues the fiscal cliff occurs too early and “amounts to overkill,” but that “well more than half of it is necessary and should not be delayed indefinitely.”

Cline said he would prefer that such structural adjustments be phased in and that the country not be forced over the cliff, particularly since estimates of the economic consequences could be understated.