Deal, or no deal? Answers on what may happen next with ‘fiscal cliff’

Boehner, Obama hustle out of town with their parties still worlds apart

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Efforts to save the nation from going over a year-end “fiscal cliff” were in disarray as lawmakers fled the Capitol for their Christmas break. “God only knows” how a deal can be reached now, House Speaker John A. Boehner declared.

President Obama, on his way out of town himself, insisted a bargain could still be struck before Dec. 31. “Call me a hopeless optimist,” he said.

Here is a look at why it’s so hard for Republicans and Democrats to compromise on urgent matters of taxes and spending, and what will happen if they fail to meet their deadline:

New Year’s headache

Partly by fate, partly by design, some scary fiscal forces come together at the start of 2013 unless Congress and the president act to stop them. They include:

• Some $536 billion in tax increases, touching nearly all Americans, because various federal tax cuts and tax breaks expire at year’s end.

• About $110 billion in spending cuts divided equally between the military and most other federal departments. That’s about 9 percent of the annual budget for the Pentagon, about 8 percent for the others.

Hitting the national economy with that double whammy of tax increases and spending cuts is what is called going over the “fiscal cliff.” If allowed to unfold over 2013, it would lead to recession, a big jump in unemployment and financial market turmoil, economists predict.

What if they miss the deadline?

If New Year’s Day arrives without a deal, the nation shouldn’t plunge onto the shoals of recession immediately. There still might be time to engineer a soft landing.

As long as lawmakers and the president appear to be working toward agreement, the tax hikes and spending cuts could be held at bay for a few weeks. Then they could be repealed retroactively once a deal is reached.

The big wild card is the stock market and the nation’s financial confidence: Would traders start to panic if Washington appeared unable to reach accord? Would worried consumers and businesses sharply reduce their spending? In what could be a preview, stock prices around the world dropped Friday after House Republican leaders’ plan for addressing the fiscal cliff collapsed.

Federal Reserve Chairman Ben S. Bernanke has warned lawmakers that the economy already is suffering from the uncertainty and that they shouldn’t risk making it worse by blowing past their deadline.

What if they never agree?

If negotiations between Mr. Obama and Congress collapse completely, 2013 looks like a rocky year.

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