America Going Over the Fiscal Cliff

The economy will slip back into a recession next year if the country goes over the “fiscal cliff” due to inaction by the White House and Congress. That’s the dire warning of the nonpartisan Congressional Budget Office without an agreement to cut spending and prevent tax hikes by the end of the year.

Automatic spending cuts of $100 billion in spending on the military and domestic programs (except Medicare, Medicaid and social Security) will take effect in January after a congressional supercommittee last year was unable to agree on $1.2 rillion in long-term deficit reduction under the Budget Control Act of 2011.

The stalemate has blocked a decision on whether to extend Bush-era tax cuts due to expire at the end of the year.

President Obama and Democrats want to extend tax cuts for everyone except individuals earning more than $200,000 and couples earning above $250,000. Republicans reject that approach as raising taxes on job-producing small businesses. Both sides have dug in with no action expected until after the election, if then.

Doing nothing, which would implement spending cuts and tax hikes, would reduce the federal deficit from just over $1 trillion to about $641 billion, the CBO said. But that is money that would also come out of the economy. In this scenario, the budget office predicts the economy will shrink by 0.5 percent next year.

Without some agreement, the pending combination of tax increases on more than 100 million Americans and spending cuts would total nearly $500 billion next year, according to the budget office.

It “would lead to economic conditions in 2013 that will probably be considered a recession.” It would result in the loss of 2 million jobs and push the unemployment rate from about 8 percent now to almost 9 percent by late next year.

Douglas Elmendorf, the budget office’s director, said the “economy right now is being held back by anticipation of this fiscal tightening.”

In contrast, delaying the tax increase and holding off on spending cuts would allow the economy to grow by 1.7 percent next year and save 2 million jobs.

With Congress reconvening after a 5 week recess I'm sure they'll do just what they've done the past four years. Nothing.