We'll go over the much-dreaded fiscal cliff, as the game of chicken our politicians are playing continues, predicts Robert Reich, former Labor Secretary under President Bill Clinton.
Large, across-the-board spending cuts and tax increases, including the expiration of the Bush tax cuts, are scheduled to go into effect Jan. 1 unless Congress acts.
But Democrats believe they'll have more bargaining power after tax rates increase automatically for everyone, Reich wrote on his blog. Democrats, who want to end the Bush tax cuts for people earning over $250,000, hope to trap the GOP by doing nothing until next year. Republicans, they reason, will have to choose between a tax cut for the middleclass or no tax cut at all.
Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown
Republicans, meanwhile, might delay a deal until February or March, when they believe they'll have more bargaining power because that is when the debt ceiling must be raised. They can block raising the debt ceiling unless they get their way, says Reich, a professor at the University of California, Berkeley.
If Congress reaches a deal sometime next year, tax rates would likely be retroactive back to Jan. 1, so going over the fiscal cliff would be more like going down a hill, he says.
Going over the cliff for a couple weeks might mean a drop of just 0.1 percent in U.S. economic output, according to the Financial Times.
"Economic policymakers in Washington, however, consider it foolish to think that the U.S. can go off the fiscal cliff and then painlessly climb back up," writes Robin Harding for the Financial Times.
The real damage will be the blow to confidence. Failure to reach a deal soon might prompt credit rating agencies to downgrade the government, causing a fiscal fiasco.
Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown
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