Economists Look for Fiscal Cliff Compromise

Economists Look for Fiscal Cliff Compromise

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Now that the election is over, some economists anticipate a temporary fix by Congress and the Obama administration to avoid a recession-inducing year-end fiscal cliff.

Paul Ashworth and Paul Dales of Capital Economics, a Toronto-based economic research firm, predict that the Democrats will likely agree to extend the expiring Bush-era tax cuts to all income earners, including the wealthiest, in exchange for Republican agreement to delay deep spending cuts set to automatically take effect in early January.

But that may be wishful thinking. Both parties have made clear their unwillingness to compromise on the tax cut extension. President Obama has already threatened   to veto legislation that extends tax cuts to families earning more than $250,000 and individuals earning more than $200,000 annually, while House Speaker John Boehner, R-Ohio, has said he will not budge on tax hikes for the rich

During his news conference on Capitol Hill on Wednesday, Boehner said Republicans might support raising revenues by changing the tax code to lower rates and eliminate loopholes to spur economic growth, but are opposed to raising tax rates on higher income people and small businesses.

Ashworth and Dales predict that if the administration and Congress essentially kick the can down the road and put off a long-term budget deficit solution until next year, that would lead to more credit rating downgrades. They said it will also create more economic uncertainty which could weigh on businesses and slow down the recent resurgence in hiring and consumption.

Senate Majority Leader Harry Reid, D-Nev.,  told reporters Wednesday that he wants to work on deficit reduction during the lame duck session of Congress instead of using a temporary fix to avert the fiscal cliff. “I’m not for kicking the can down the road,” Reid said. “Waiting for a month, six weeks, six months – that’s not going to solve the problem. I think that we should just roll up our sleeves and get it done.”

- Read more at The Wall Street Journal

Ratings agency Fitch didn’t give President Obama much time to celebrate his re-election before saying on Wednesday that he must quickly forge a compromise with Congress to prevent a slew of tax hikes and spending cuts from taking effect Jan. 2 – or  risk losing the federal government’s =top ‘AAA’ credit  rating next year.

- Read more at CBS News  

Major stock indexes were down more than 2 percent halfway through the first trading session on Wednesday, with analysts blaming it on fear of the fiscal cliff.  The Dow closed down 312 points, or 2.36 percent, to 12,933; the S&P closed down almost 34 points, or 2.37 percent, to 1,395; and the Nasdaq closed down 75 points, or 2.48 percent, to 2,937.

“We’ve gotten certainty on the presidency and now we move into the uncertainty of where we were before – the fiscal cliff,” said Quincy Krosby, a market strategist at Prudential Financial. “The market’s not going to have much patience to wait to see when the negotiations begin in earnest and how they evolve.”

- Read more at The Los Angeles Times  

For more news on the approaching fiscal cliff, follow us on Twitter @Fiscalcliffnote


Brianna Ehley is the former Washington Correspondent for The Fiscal Times. She is currently a reporter on Politico's health care team in Washington, D.C.