It looks like just two options remain for policymakers in Washington: a proactive, eleventh-hour compromise that prevents a tax hike on the majority of Americans and curbs the worst of the fiscal cliff austerity measures, or a retroactive deal that will undo the economically-draining policies set to take effect over the course of 2013. Either way, market participants are tepid and the invisible hand is idle on Monday as economists refine their gloomy forecasts for the New Year.
The fiscal cliff is a combination of draconian spending cuts and undesirable tax increases that was agreed to in the spirit of mutually assured destruction. The deal was reached the last time America’s growing deficit and debt problem was front and center in the national dialog: summer 2011. Policymakers gave themselves a ticking clock in hopes that they would find a way to work together against a common, self-imposed economic enemy. They also hoped to push back any potentially unpopular policy changes until after the 2012 elections.
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While the fiscal cliff would dramatically reduce America’s deficit and ostensibly lead to a long-term reduction in the country’s growing debt, it would also pull so much money out of the economy that many experts fear it would trigger another recession. At best, economists like Nigel Gault at IHS Global Insight are slashing GDP growth expectations under fiscal cliff policies to just 1 percent in the first quarter of the New Year. At worst, what many were hoping would be about 2 percent growth could turn into a recession.
More or less the same pair of roadblocks have been in the way since the beginning of negotiations. Republicans don’t want to see any increase in taxes, while Democrats want the rates to increase on America’s wealthiest citizens. Democrats want to protect social programs, while Republicans want substantial entitlement reform. Early hopes of a so-called “Grand Compromise” largely evaporated when Speaker of the House John Boehner’s (R-Ohio) “Plan B” proposal was torpedoed by his own party…