As a general rule, the U.S. Congress does nothing, except to avoid the consequences of doing nothing. That's why today's report from the Congressional Budget Office is so important: It states clearly what happens if nothing happens between now and January. The answer is, well, budgetpocalypse.
CBO projects that the so-called "fiscal cliff" -- a double-whammy of tax hikes and spending cuts -- in early 2013 will produce a short and sharp recession followed by rising unemployment throughout the entire year. If you want to know why the Do-Nothing Congress will act out of character by January 1, 2013, read this report.
On January 1, 2013, America's tax and spending picture changes suddenly and dramatically. Taxes go up by about $400 billion. (The Bush/Obama tax cuts expire, the stimulus tax cuts expire, the payroll tax cuts expire, the business investment tax cuts expire, *and* the health care reform tax increases begin.) Spending goes down by about $100 billion. (The Budget Control Act, which cuts into discretionary spending, coincides with reduced unemployment insurance payments and a sharp drop in Medicare payment rates for physicians.) That's a painful bite for an economy clinging to growth and 8% unemployment.
We'd lose our grip on both things -- growth and 8% unemployment -- without further action. Unemployment would go back to 9%. Real GDP would fall by about 3% in the first half of 2013. The double-dip would be very real.
Congress suffers from severe status quo bias, but this is a status quo that benefits nobody. Nobody should want the economy to crater again. Republicans and Democrats agree that 98% of taxpayers should benefit from the same low rates they have today. The GOP is as nervous about swift cuts to defense as Democrats are nervous about swift cuts to non-defense discretionary programs.
And so, we'll almost certainly get a deal. This is sure to make the staunchest deficit hawks furious. After all, the Budget Control Act of 2011, conceived in the twilight of the debt ceiling talks, was the culmination of a long debate over how to fix our long-term budget. A short-term bargain that spares us from a double-dip recession would also preserve our tall deficits next year, pushing off that day when both sides agree on a multi-trillion-dollar agreement to raise taxes and cut spending. Given today's tax climate, we couldn't possibly be any further from that day. So expect Congress to do what it does best, after doing nothing -- something, just enough, and at the very last minute.