Fiscal patch possible, but some pain would be felt very quickly

  • Article by: NELSON D. SCHWARTZ , New York Times
  • Updated: December 25, 2012 - 9:01 PM
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Speaker of the House John Boehner

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Quick action by President Obama and Congress could still help the economy escape the full impact of hundreds of billions in tax increases and automatic spending cuts set to take effect shortly after the last minutes of 2012 tick away next week.

But if the deadlock in Washington persists much longer than a few weeks, the consequences will quickly mount, economists warn.

Obama was planning to cut short his Christmas vacation in Hawaii and return to Washington. A White House official said Tuesday that the president could depart as early as Wednesday.

Until late last week, most observers had expected the president and congressional Republicans to come up with at least a short-term compromise before the year-end deadline.

But the failure of Speaker John Boehner to win support for tax increases on the wealthiest Americans from fellow House Republicans has forced economists to reconsider what might happen if the deadlock persists into 2013.

Wall Street is still betting on a quick deal, but that confidence is misplaced, said Julia Coronado, chief North American economist at BNP Paribas.

"Markets have been incredibly complacent about this," she said. If a compromise cannot be found by Jan. 1, she said, "the markets will take that hard."

Some hits -- like a 2 percentage point increase in payroll taxes and the end of unemployment benefits for more than 2 million jobless Americans -- would be felt right away.

But other effects, like tens of billions in automatic spending cuts, to include both military and other programs, would be spread out between now and the end of fiscal 2013 in September.

The Congressional Budget Office predicts that if the impasse lasted even longer and the full force of more than $500 billion in tax increases and spending cuts hit the economy, the country would slip into recession in the first half of 2013.

But for all the pessimism recently, most observers still think a compromise will be reached, even if it takes a few more weeks.

Negotiations are set to resume in coming days, although hopes for a so-called grand bargain have faded.

Instead, Obama is pushing for a scaled-back plan that would extend the Bush-era tax cuts on incomes below $250,000, while suspending the automatic spending cuts and extending unemployment benefits.

Michelle Meyer, senior U.S. economist at Bank of America Merrill Lynch, said there is a 40 percent chance of what she calls a "bungee-jump over the fiscal cliff," with Congress failing to act until after Jan. 1 but averting the full brunt of taxes and cuts by mid-January.

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