WASHINGTON -- As Election Day looms, so does a potential crisis that threatens to send the economy hurtling back into recession.
Dubbed the fiscal cliff, the double whammy of tax increases and deep spending cuts slated for Jan. 1 would siphon more than $600 billion from the US economy next year unless Congress and President Obama work together to intervene, economists say. Lawmakers return a week after the election to address the matter, but given their recent track record, along with the caustic tenor of this election season, the prospects for their success are at best uncertain.
Neither Obama nor rival Mitt Romney has made this specific problem a focus of his campaigning. Yet pressure has been building on Washington to find a way out of the fiscal morass — from Wall Street, economists, political scientists, and policy analysts. Some analysts say the public may not be aware of the high stakes.
“At this point, it’s pretty easy to paint dark scenarios,’’ said William A. Galston, a senior fellow at the Brookings Institution, a nonpartisan think tank. “There’s no question bad things will happen — highly visible and painful things. If Congress really wants to destroy its standing with the public, they can retreat to their partisan trenches.”
According to the nonpartisan Congressional Budget Office, inaction on Capitol Hill would lead to falling wages, rising unemployment, and lackluster national productivity, all of which would drag the economy back into recession.
The fiscal cliff is a confluence of events, all triggered at roughly the same time. At the end of the year, a handful of major tax breaks are set to expire — a so-called Taxmageddon that includes the Bush tax cuts initially put in place in 2001 and payroll tax cuts enacted by Obama to prime the economy. Republicans want to extend all the Bush cuts, saving taxpayers about $180 billion next year. Democrats want to let them expire for the nation’s wealthiest taxpayers, those joint filers making more than $250,000 annually.
Also at the start of the New Year would be a round of automatic budget cuts mandated under a deficit-reducing deal reached last year that will cleave $1.2 trillion in projected spending over the next decade. About $110 billion in cuts would be divided roughly equally between the Pentagon and domestic programs. While these would help reduce the deficit in the long run, they could prompt layoffs in such industries as defense and limit benefits for some Americans, which could stagger the economy in the short term.
The stakes are so high, analysts say, that Congress will be compelled to do something, even if it involves such temporary measures as extending the tax cuts for a few months or delaying the cuts until the new Congress is seated.
The fiscal cliff has drawn little direct attention from either Obama or Romney on the stump. Neither used it as a talking point in any of the three presidential debates, although both have said they would find a way out of the mandated spending cuts and have offered general policy pronouncements about spending.
“Whoever wins the presidential election is just part of the story,’’ said Ross Baker, a Rutgers University political scientist who earlier this year spent four months embedded as a fellow in the office of Senate majority leader Harry Reid. “It’s also about what Congress is willing to do.”
Should Romney win the White House, he would have no formal authority until he takes the oath of office on Jan. 20, and it would be up to Obama, Reid, and House Speaker John Boehner to find a way forward.
Nevertheless, Romney would be expected to have considerable influence among Capitol Hill Republicans over how to proceed.
No matter who wins, an immediate clash could erupt between congressional partisans, who have been unwilling to set aside philosophical differences over taxes and spending.
“It’s going to be hand-to-hand fighting,” Baker said.
In an interview with the Des Moines Register last week, Obama expressed confidence that a so-called “grand bargain” could still be negotiated with Republicans that would both prevent the fiscal cliff in the short term, while allowing for deficit reduction once the economy improves.
“It will probably be messy,’’ the president said. “It won’t be pleasant. But I am absolutely confident that we can get what is the equivalent of the grand bargain that essentially I’ve been offering to the Republicans for a very long time.”
Obama predicated that scenario on two suppositions: His reelection would provide him political capital and Republicans would be chastened enough to soften their antitax approach.
Obama has offered a solution before that seeks to encompass both short-term and long-term problems: a $4 trillion blueprint in spending cuts and tax increases that Democrats billed as a “balanced” approach. The plan would be implemented gradually, to prevent the economic shock of the fiscal cliff. Ultimately, the plan was rejected by Republicans who thought spending cuts did not go far enough and balked at raising taxes on the wealthy.
Obama and his negotiating partner then, Boehner, reportedly have not spoken in months. Last week, Boehner was to-the-point in his assessment: “The president and his party haven’t lifted a finger to solve these problems.’’