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US economy could withstand brief fall off 'cliff'

Published on NewsOK Modified: December 12, 2012 at 5:28 pm •  Published: December 12, 2012
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The IRS has said it assumes Congress and the White House will fix the AMT in a deal to avoid the cliff. If they don't, the IRS will need weeks to reprogram computers and make other adjustments. In the meantime, nearly 60 million taxpayers couldn't file tax returns early next year because they couldn't determine whether they owe the AMT. Refunds would be delayed.

One immediate spending cut would be the end of extended unemployment benefits. Most states provide benefits for 26 weeks. But since 2008, the federal government has provided an emergency benefits program. This adds an average of 32 weeks, depending on the state, for a total of 58 weeks of benefits for the long-term unemployed.

If the extended benefits end Jan. 1 as scheduled, about $30 billion would be saved next year. But without that money, about 2 million people who have been out of work for more than six months would lose benefits averaging about $320 a week.

Economists note that recipients of unemployment aid tend to spend that money quickly, giving a lift to the economy. The expiration of the extended benefits would cut economic growth by about 0.2 percentage point next year, the Congressional Budget Office estimates.

The gravest scenario would be if the budget talks collapsed, negotiators went home and the tax increases and spending cuts appeared to be permanent.

In that case, Macroeconomic Advisors, a forecasting firm, warns that the Dow Jones industrial average could plunge up to 2,000 points within days. Businesses would turn gloomier in anticipation of Americans paying higher taxes. Retailers would order fewer cars, appliances and clothing. Consumers' confidence would likely plummet, followed by their spending.

The economy would shrink at an annual rate of 0.6 percent in the first three months of 2013, estimates Joel Prakken, an economist at Macroeconomic Advisors. That compares with an estimated 1.9 percent growth rate if a deal is reached.

CBO forecasts that the economy would decline 0.5 percent in the first half of 2013 and fall into recession. The unemployment rate would rise to 9.1 percent from the current 7.7 percent.

Most economists are counting on fear of such a disaster to prod Congress and the White House to make a deal. But analysts expect the Social Security tax cut and extended unemployment benefits to end. Those two changes would lower growth by 0.7 percentage point next year, the CBO estimates.

Under that scenario, Social Security taxes would revert back to 6.2 percent on the first $110,000 of income, up from 4.2 percent. The increase would cost someone earning $50,000 an extra $1,000 a year, or nearly $20 a week.

Some consumers have been getting nervous. Mike Duke, CEO of Wal-Mart Stores Inc., said Tuesday that in a poll last month of the store's shoppers, an overwhelming majority were aware of the threat of high taxes from the cliff. And some said it would lead them to cut back their holiday buying, Duke said. Wal-Mart, the world's largest retailer, is considered an economic bellwether.

Consumer confidence fell sharply this month, according to a survey by the University of Michigan, partly because of worries that taxes will rise next year.

For all their combative rhetoric, the White House and House Republicans have identified areas that could underpin a budget deal. Both sides concede, for example, that higher tax revenue and lower spending on programs like Medicare, the government health insurance program for the elderly, will be included.

Whatever the outcome, some trends could offset part of the economic damage. Ashworth notes, for instance, that the average retail price for gasoline has dropped 15 percent this fall. Lower gas prices give consumers more money to spend elsewhere.

And if the crisis is resolved, as many expect, the boost to business and consumer confidence would encourage more hiring and spending.

On Tuesday, the Business Roundtable, a group of large company CEOs, urged Congress and the White House to avoid the cliff by striking a budget deal containing about $4 billion in tax increases and spending cuts.

"We could end up with a much more robust recovery than anybody's envisioned" if a deal is reached, said David Cote, CEO of Honeywell International.

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AP Business Writer Anne D'Innocenzio in New York contributed to this report.

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Follow Christopher Rugaber on Twitter at https://Twitter.com/ChrisRugaber