Risk-assessing the Fiscal Cliff
The threat of the austerity bomb is quite real. It doesn't all happen on January 2nd, but if nothing is done to change the current legislation in place the USA will, indeed, enter a new recession in 2013.
The television and the stock market are convinced that *something* will be done, but have no idea what that might be.
This is a type of thinking that is right 99% of the time and ruinous 1% of the time, which leads to flawed risk assessment. (If the ruinous 1% of the time is bad enough it would be rational to always prepare for the worst. We wear seat-belts despite, one hopes, having a much better than 99% crash-free trip history.)
I also think that *something* will be done, but all solutions require that either 20-25 Republicans vote for a more progressive tax-rate system or President Obama decides to not veto a fix that retains the Bush tax cuts on the rich.
I think that to forestall a real calamity Obama would sign a bill he did not like, so the odds of *something* being done to prevent a return to recession in 2013 are high. In the worst case scenario Obama would probably not tank the economy just to be a tough guy.
I am not certain that the Republicans would act to forestall calamity. They might. They might not.
In a true game of chicken versus an insane opponent a sane person always loses. The regulator here is the Republican perception of the political downside, to them, of being insane... a hard to assess factor.
And it is made made harder to assess because the Republicans are in civil war — "the Republicans" are not concerned with the health of the Republican party. Each Republican is concerned with is own welfare, and the welfare of his faction. (As Newt Gingrich figured out, the easiest way to take something over is to wreck it first. He ginned up a bogus congressional checking scandal that hit as many Republicans as it did Democrats, but his objective was to make the public hate Congress as an institution, making an anti-incumbent election more likely.)
Here is what should happen. Resolve the fake crisis in a way that does not reduce net American disposable income 2013-2014. If taxes on the rich go up taxes for the non-rich should go down, or the revenue should go to new government spending. Social security and Medicare benefits obviously off the table. The only objective at this point in the cluster-fuck should be to maximize American GDP 2013-2014. The recovery is very fragile and if things start down again it will be harder than ever to get them turned back up. Whatever momentum we have must be maintained.
I have no idea what Obama really thinks this is about. If his bottom line is that we need to cut the deficit in 2013-2014 he's nuts. On the other hand, if his bottom line is short-term stimulus, long-term debt reduction that's fine. (The first White House offer, with front-oaded stimulus, was quite sensible and should have been the last White House offer, not a bargaining chip.)
In terms of what will happen? Nobody knows for sure. I would guess some very scaled down face-saving thing, which is, IMO, probably better for the nation than any big deal would be.