Will Fiscal Cliff Drama Have a Hollywood Ending?

Money Cut in HalfLess than two months stand between now and January 1, on which day a combination of tax hikes and spending cuts are scheduled to take place automatically.

The dreaded “fiscal cliff,” as the measures are referred to, has taken on fable-like proportions. Exaggerated fears depict an apocalyptic day, assuming that the fiscal cliff will cause government spending to come to a shuddering halt and personal income to plunge. But as Derek Thompson wrote in the Atlantic last week, this is just not the case; a cliff is not the appropriate topographical metaphor to use. His preference is for the term “fiscal slope” because the impending higher tax rates will diminish income over the course of the year and spending cuts will force the federal government to cut programs and layoff employees gradually.

Catalysts are critical to discovering winning stocks. Check out our newest CHEAT SHEET stock picks now.

However, this is not to say that the fiscal cliff won’t prompt a crisis if a governmental compromise cannot be reached. As former secretary of the Treasury Lawrence H. Summers told Al Hunt, the executive editor of Bloomberg News, there is an overwhelming likelihood of recession, if no agreement is reached. The nonpartisan Congressional Budget Office made the same projection, but noted that the austerity program would reduce the deficit by $700 billion by the end of next year.

But congressional compromise is yet another problem in the unfolding saga. After all, “by returning a divided government to Washington, the electorate has given neither party a clear mandate to address the lackluster recovery, the fiscal cliff, and the looming debt crisis,” Brian Kessler of Moody’s Analytics told the Wall Street Journal. While congress may see compromise as a form of political acquiescence that voters do not want, a recent USA Today/Gallup poll shows that 82 percent of adults believe “it’s either extremely or very important for Congress and the president to find a deficit-reduction deal to prevent a massive amount of tax hikes and spending cuts from kicking in at the beginning of next year.”

Even President Obama emphasized the need for compromise in his news conference on Wednesday, asking “The only question now is are we going to hold the middle class hostage in order to go ahead and let that happen?”

In typical fashion, congressional Republicans and Democrats are situated in opposite camps, with the right favoring the closure of loopholes and the left pushing tax hikes on the rich, but there are some signs that an agreement could be reached. Reuters reported on Tuesday that “Obama and the Republican leadership of the House of Representatives have signaled a more conciliatory tone since last week’s election.” Furthermore, as The Economist argued, once the budget cuts and tax hikes gradually start to affect the U.S. economy in January, both parties will be better situated to resolve the fiscal cliff dilemma.

Don’t Miss: Is Obama Asking for Too Much Revenue?

More Articles About:   ,  

More from The Cheat Sheet