The fiscal cliff – peering over the edge

Two days after the election, many in the press have turned to analyzing the fiscal cliff and how the president and congress will solve the looming problem. With less than six weeks until the end of the year, it’s not a minor problem.

First off, the Congressional Budget Office said if nothing is done the economy will be pushed back into a recession next year and unemployment would climb back to 9.1 percent by the end of 2013. More from the Wall Street Journal story:

The CBO analysis said if Congress reaches a deal to avoid the fiscal cliff later this year the federal budget deficit would be $503 billion higher than it otherwise would have been in fiscal 2013, and $682 billion higher in fiscal 2014.

Barring congressional action, federal income, dividend and capital-gains tax rates will increase on Jan. 1., 2013, and the estate tax will revert to a higher rate while applying to smaller estates. Meanwhile $110 billion in cuts to federal spending on defense and other domestic programs will take place as an initial down payment for $1 trillion in cuts that are required through the next decade under last year’s deficit deal.

Negotiations between the White House and Congress are expected to begin soon to reach a budget compromise to avoid the fiscal cliff.

Let’s hope they start today since no one wants to see the economy slide backwards. But it isn’t just up to the president, as Bloomberg News points out:

Obama can’t do it alone. Prospects for a broad deficit- reduction deal also turn on whether Republicans — who kept their majority in the U.S. House in the elections while falling short of capturing the Senate — are willing to compromise with the president on using tax revenue to reduce the deficit. They have refused to consider raising taxes to help pay for a deal, even one underwritten disproportionately by spending and entitlement cuts.

At a news conference on Capitol Hill yesterday, U.S. House Speaker John Boehner, a Republican, said all sides are “closer than many think” to a U.S. tax-code overhaul. Still, he didn’t waver from his party’s opposition to tax increases, which Democrats have said is a prerequisite for any deal that cuts spending on social programs or curbs the growth of programs including Medicare.

Obama campaigned on a proposal to raise taxes on individuals earning $200,000 annually and couples making $250,000. Exit polls indicated that while voters overwhelmingly don’t want to see their own taxes rise, 47 percent back raising taxes on the wealthy.

Senate Minority Leader Mitch McConnell, a Kentucky Republican, said the divided-government election result showed that voters want Obama to do more to collaborate with Congress to fix the nation’s problems.

Investors are certainly signaling that a solution can’t come soon enough. This from Reuters:

Shares on Wall Street fell on Thursday as investors continued to adjust for upcoming negotiations over the so-called fiscal cliff, overshadowing a batch of positive economic data.

Investors worry that if no deal is reached in Congress over the fiscal cliff — some $600 billion in spending cuts and tax increases set to kick in early next year — it could derail the American economic recovery.

But the prospect of haggling among lawmakers about ballooning federal budget deficits has deepened the uncertainty for investors, who have sold stocks partly on the expectation taxes will go up on capital gains and dividends.

And as CNN Money points out, some think the election brought the President and lawmakers closer together, while others believe the partisan divide on taxes grew wider:

The fiscal cliff is the legislative equivalent of a slow-motion train wreck that Congress and President Obama can avoid … but only if they work together.

Some seasoned Washington observers think they will do just that, despite their troubled history, because they don’t want to be blamed for what happens if they fail.

But others say there’s a good chance they won’t because the election did nothing to ease the partisan chasm over taxes. They argue that only a market crash or a crisis over the country’s debt ceiling will force their hand.

Among the fiscal cliff policies at issue: reductions in both defense and non-defense spending; the expiration of the Bush tax cuts; the end of a payroll tax holiday and extended unemployment benefits; and the onset of reimbursement cuts to Medicare doctors.

 Lawmakers must choose whether to leave those measures in place, replace some or all of them, postpone them or cancel them entirely. Their decision will affect the economy, the country’s credit rating and the U.S. debt burden.

With all this at stake, no wonder stocks have been down and all eyes are turned to Washington to see what happens. Even if a final deal isn’t close, we’re guaranteed to get every update – including who sneezed in the committee meeting.

I hope the coverage is robust. We’re all depending on it.