U.S. could han­dle a brief fall over ‘cliff’

Cliff

Austin American-Statesman - - FRONT PAGE - By Christo­pher S. Rugaber

WASHINGTON — The eco­nomic threat that’s kept many Amer­i­cans on edge for months is near­ing re­al­ity — un­less the White House and Repub­li­cans cut a bud­get deal by New Year’s Day.

Huge tax in­creases. Deep cuts in domestic and de­fense pro­grams. The like­li­hood of sink­ing stock prices, re­duced con­sumer spend­ing and cor­po­rate lay­offs. The risk of a re­ces­sion within months.

Still, the start of 2013 may turn out to be far less bleak than feared. For one thing, Pres­i­dent Barack Obama and mem­bers of Congress may strike a short­term agree­ment be­fore the New Year that post­pones spend­ing cuts un­til spring.

Even if New Year’s passed with no deal, busi­nesses and con­sumers likely would not panic as long as some agree-

ment seemed im­mi­nent. The $671 bil­lion in tax in­creases and spend­ing cuts could be retroac­tively re­pealed.

And the im­pact of the tax in­creases would be felt only grad­u­ally. Most peo­ple would re­ceive slightly less money in each pay­check.

“The sim­ple con­clu­sion that go­ing off the cliff nec­es­sar­ily means a re­ces­sion next year is wrong,” says Lewis Alexan­der, an econ­o­mist at No­mura Se­cu­ri­ties. “It will ul­ti­mately de­pend on how long the poli­cies are in place.”

It’s al­ways pos­si­ble that ne­go­ti­a­tions be­tween Obama and Repub­li­can con­gres­sional lead­ers will col­lapse in ac­ri­mony. The prospect of per­ma­nent tax in­creases and spend­ing cuts could cause many con­sumers and busi­nesses to de­lay spend­ing, hir­ing or ex­pand­ing.

With­out any agree­ment at all for months, the fis­cal cliff would cause the U.S. econ­omy to shrink 0.5 per­cent in the first half of 2013 and fall into re­ces­sion, the Con­gres­sional Bud­get Of­fice es­ti­mates. But most econ­o­mists ex­pect a deal, if not by New Year’s then soon af­ter.

“The at­mos­phere is more im­por­tant than whether the talks spill” into next year, said Paul Ash­worth, an econ­o­mist at Cap­i­tal Eco­nom­ics.

Here’s why many are op­ti­mistic that a brief fall over the cliff wouldn’t de­rail eco­nomic re­cov­ery:

Though the fis­cal cliff would boost taxes by $586 bil­lion for all of 2013, the tax hit for most peo­ple would be mod­est at first. The ex­pi­ra­tion of So­cial Se­cu­rity and in­come tax Pres­i­dent Barack Obama and Speaker John Boehner may reach a short-term deal be­fore the new year, avert­ing panic if a big­ger deal seems im­mi­nent. cuts would be spread through­out 2013. For tax­pay­ers with in­comes of $40,000 to $65,000, pay­checks would shrink an av­er­age of about $1,500 next year. That would be a sig­nif­i­cant bite over the full year, but the ini­tial hit would be $130 in Jan­uary, ac­cord­ing to the non­par­ti­san Tax Pol­icy Cen­ter.

About a third of the tax in­creases wouldn’t touch most Amer­i­cans. Some would hit busi­nesses. Oth­ers, such as higher taxes on in­vest­ment in­come and es­tates, and the ex­pi­ra­tion of mid­dlein­come tax cred­its, wouldn’t come due un­til Amer­i­cans filed their 2013 taxes in 2014.

The In­ter­nal Rev­enue Ser­vice has de­layed any in­creases in tax with­hold­ing that would oth­er­wise kick in. With­out a deal, the top in­come tax rate for sin­gle peo­ple with tax­able in­come be­tween about $36,000 and $88,000 would rise to 28 per­cent from 25 per­cent. But that won’t start to re­duce Amer­i­cans’ pay­checks in early Jan­uary, even if no deal is reached by then.

About $85 bil­lion in spend­ing cuts to de­fense and domestic pro­grams would take weeks or longer to take ef­fect. That means government agen­cies wouldn’t cut jobs right away.

If a short-term agree­ment is struck, some taxes would prob­a­bly still go up. Th­ese would in­clude a 2 per­cent­age point cut in So­cial Se­cu­rity taxes that’s been in place for two years. Its ex­pi­ra­tion would cost the typ­i­cal house­hold about $1,000 a year. With in­come gains slug­gish, that could dampen con­sumer spend­ing.

And a tem­po­rary deal that de­lays some hard de­ci­sions could re­duce busi­ness and con­sumer con­fi­dence. It would also mean:

Ex­tended un­em­ploy­ment ben­e­fits would end for 2 mil­lion peo­ple.

The stock mar­ket would prob­a­bly drop, though maybe not by much.

The ex­pi­ra­tion of the So­cial Se­cu­rity tax cut and the end of emer­gency un­em­ploy­ment ben­e­fits would likely shave 0.7 per­cent­age point off eco­nomic growth next year, the CBO es­ti­mates.

If no deal at all was reached by Jan­uary and bud­get talks dragged on, many busi­nesses might put off in­vest­ment or hir­ing. That’s why most econ­o­mists say it would be cru­cial to reach a deal within roughly the first two months of 2013.

The gravest sce­nario would be if the bud­get talks col­lapsed and the tax in­creases and spend­ing cuts ap­peared to be per­ma­nent.

In that case, Macroe­co­nomic Ad­vi­sors warns that the Dow could plunge up to 2,000 points within days.

The econ­omy would shrink at an an­nual rate of 0.6 per­cent in the first three months of 2013, es­ti­mates Joel Prakken, an econ­o­mist at Macroe­co­nomic Ad­vi­sors. That com­pares with an es­ti­mated 1.9 per­cent growth rate if a deal is reached. The CBO fore­casts un­em­ploy­ment would rise to 9.1 per­cent from the cur­rent 7.7 per­cent.

And if the cri­sis is re­solved the boost to busi­ness and con­sumer con­fi­dence would en­cour­age hir­ing and spend­ing.

“We could end up with a much more ro­bust re­cov­ery than any­body’s en­vi­sioned” if a deal is reached, said David Cote, CEO of Honey­well In­ter­na­tional.

Boehner

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