Enlarge Carolyn Kaster/AP
Obama and House Speaker John Boehner at the White House in July 2011.
They are scheduled to meet at the White House again next week to discuss
the looming fiscal cliff.
This week, President Obama will meet with
congressional leaders to begin working out a deal to avert a budget
calamity commonly known as the fiscal cliff.
are unanimous in saying that if the leaders fail to keep the country
from going over the "cliff," both the stock and labor markets will
fairly quickly go "splat."
To keep that from
happening, Congress must pass legislation to stop or delay or phase in
the coming budgetary changes collectively called the fiscal cliff. That
phrase refers to a massive collection of automatic tax increases and
spending cuts that kick in at year's end. If they are all allowed to
take full effect, it would be like tying a $600 billion weight to the
The problem is that Democrats want
to fix some of the issues by increasing taxes on the wealthiest
Americans, and Republicans oppose hikes in tax rates.
"We can't just cut our way to prosperity," Obama said Friday. "We have to combine spending cuts with revenue and that means asking the wealthiest Americans to pay a little more in taxes."
Obama spoke, House Speaker John Boehner, the top GOP leader in
Washington, said House Republicans won't agree to higher rates but would
be open to limiting tax breaks to raise revenues. "It's clear there are
all kinds of deductions, some of which make sense, some of which
don't," he said.
The two men seemed to be
leaving themselves room to negotiate. Whether they will compromise is
unknown. But economists and investment experts say one thing is clear:
that failure to do so would derail the recovery.
there will be an economic reversal unless Congress acts, said Garth
Friesen, who serves on the Federal Reserve Bank of New York's Investor
Advisory Committee. He also is a top investment officer for III
Associates, a hedge fund.
Every American who
earns a paycheck or owns stock will get hit with higher taxes, Friesen
said. "That's across the board — from the lowest taxpayers to the
wealthiest," he said. "It's everybody."
while some of the changes may take a while to be fully felt, many are
"like a light switch," Friesen said. The tax hikes will switch on as New
Year's parties end.
IHS Global Insight, a
forecasting firm, says that if Congress and the White House were to hit
an impasse, it "would be a recipe for turmoil in the financial markets."
Here are some ways that that economy will get hit:
Payroll tax cut. To give consumers more cash to spend, Congress lowered payroll taxes
by 2 percentage points during 2011 and 2012. For someone making $50,000
a year, that worked out to about $20 a week. If the tax holiday ends
abruptly, take-home pay will immediately shrink.
Bush tax cuts. On Jan. 1, all of the tax cuts that were phased in, starting in 2001, will expire. That will mean higher taxes on both income and investments.
Ever since the economy tanked in 2008, Congress has been extending
benefits beyond the standard 26 weeks. Those extensions will end in the
new year, so lots of job seekers will be on their own in January.
Depreciation incentives. Businesses will lose special depreciation allowances that encouraged capital equipment purchases.
Unless Congress changes the law, automatic spending cuts worth $1.2
trillion over a decade will kick in. They hit particularly hard at military spending, so many people who work for contractors will lose jobs.
would all of that do to the economy? A study by J.P. Morgan Asset
Management said that "this amount of fiscal drag would push the U.S.
economy into recession."
And that, the company concluded, would "lead to a very unhappy U.S. population."
As negotiations begin this week, here are terms that are likely to be used a lot.
The action of taking legal
possession of something. For example, a judge can sequester a jury,
i.e., hold it in isolation in a hotel, until a trial is over. In the
case of the federal budget, Congress passed legislation in 2011 that
ordered the Treasury to, in effect, sequester the budget authority that
would allow the government to spend $109 billion on defense and domestic
programs in 2013. This sequestration process is scheduled to continue
each year until the Treasury has saved about $1.2 trillion to help hold
down the national debt. Lawmakers had hoped that by setting up these
broad, automatic spending cuts, they would motivate themselves to find
more carefully considered trims. But Congress has not passed a
deficit-reduction package, or passed legislation to end sequestration.
So the deadline is drawing closer as the year winds down.
A government's annual
income. Most revenue comes from taxes, but some comes from fees and
other sources such as sales of assets. To balance the budget, government
must either increase its streams of revenue and/or cut spending. Many
Democrats say they are willing to pass certain spending cuts, especially
for military spending. But Republicans have opposed any tax rate
increases. After the election, however, House Speaker John Boehner,
R-Ohio, said Republicans are now "willing to accept new revenue under
the right conditions ... a simpler, cleaner, fairer tax code, with fewer
loopholes and lower rates for all."
The national debt is the
total of all the financial obligations the federal government failed to
pay off in the past. Each year, the government takes in revenue and then
pays its bills. Those bills include the repayment of money borrowed
from bondholders, salaries of federal workers, payments to contractors,
and so on. Ideally, the revenue coming in to the Treasury should be the
same, or even greater, than the amount being paid out. But that balance
rarely happens. Far more often, the government spends more than it
makes, so it has to borrow yet more money to get through the year. That
creates an annual budget deficit. Those deficits pile up year after
year, and collectively, they add up to the national debt, which is about
$16 trillion now.