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Fiscal cliff? Some would rather dive than make a bad deal

WASHINGTON – President Obama says going over the so-called fiscal cliff by missing the deadline for a deficit reduction deal by year’s end would be a “rude shock” for Americans. Republican House Speaker John Boehner says it would be a “fiasco.”

Yet a small and potentially influential group of lawmakers in both parties is emerging as fiscal-cliff skeptics, willing – and some even arguing – to take the dive.

Allowing the more than $600 billion mix of tax increases and automatic spending cuts to begin in January if no deal is reached isn’t their first choice, these lawmakers said, yet it’s a better alternative than a compromise that violates their principles.

Democrats

Sen. Patty Murray of Washington, the fourth-ranking Democrat in the leadership, said her side is willing to push the debate into 2013 if Republicans refuse to raise taxes on high earners as part of the deal.

“No one wants to go off any cliff or hill or slope; there is a responsible way to resolve this,” Murray said Thursday on MSNBC. “But if we take a bad deal and say that all of the nation’s fiscal problems are to be balanced on the back of middle-class families and the wealthy don’t participate, that’s a bad deal that we cannot and should not live with.”

Republicans

In the other party and on the other side of the Capitol, Rep. Joe Walsh of Illinois said, “Nobody knows how bad or ugly it would get, so because nobody knows, we don’t want to do it.”

A Republican aligned with the small-government tea party who lost his re-election bid this month, Walsh said: “The thing that would be much worse would be to craft a bad deal that would do anything that raises taxes. Doing what’s right over the next couple weeks is more important than doing something that would harm our economy in the name of meeting a silly deadline.”

The doubters’ caucus remains small, as most lawmakers are urging Republican leaders and Obama to reach an agreement and avoid sending yet another shock to the fragile economic recovery. The business community also is working the halls of Congress to convince lawmakers of the economic need to strike a deal and begin work on reducing the deficit.

Stock market

Yet the countering voices in both parties are an unsettling dynamic for investors who find the prospect of the fiscal cliff unacceptable.

The Standard & Poor’s 500 Index fell as much as 0.6 percent on Tuesday after Senate Majority Leader Harry Reid, D-Nev., suggested no headway had been made beyond initial “happy talk” from Republicans.

The benchmark equities gauge declined 0.5 percent in three minutes yesterday, erasing an earlier rally, after Boehner, of Ohio, said “no substantive progress” had been made toward a deal. The S&P 500 then recovered as Chuck Schumer of New York, the Senate’s third-ranking Democrat, said there has been progress in talks, and the index ended the day with a 0.4 percent gain.

“The market is at the mercy of the fiscal cliff until we get some sort of resolution,” Liz Ann Sonders, the New York- based chief investment strategist at Charles Schwab, which has $1.9 trillion in client assets, said in a telephone interview. “Mathematically, the worst scenario is if we go fully off the cliff.”

New recession?

Economic forecasters, including the Congressional Budget Office, estimate the economy would likely go into recession in the first half of 2013 if Congress did nothing and allowed all the tax increases and spending cuts to take effect.

Sen. Jim DeMint, R-S.C., says doing nothing is “unacceptable” yet doubts the consequences of going over the cliff would be as dire as predicted. Businesses have already anticipated the tax increases that would result and the Pentagon has ways of shifting money around to absorb the effects of the automatic budget cuts on defense spending, he said.

“It’s been hyped to a level to create a crisis so that there will be widespread panic at the end of the year when they come out with their proposal,” DeMint said of Obama and Democrats. “The key thing is how the markets respond to these tax rates, and how the rating agencies respond to whether or not we make cuts.”

High-ranking Democrats were the first to make it clear they were willing to go over the cliff and enhance their negotiating position.

Murray said such an approach may relieve pressure on Republicans who signed an anti-tax-increase pledge promoted by Americans for Tax Reform, a Washington-based group founded by Republican activist Grover Norquist. Over the cliff are automatic tax increases that would raise marginal rates to 2000 levels, with a top rate of 39.6 percent, up from 35 percent now.

“When we come back in January, anything we do will be a tax cut and the Grover Norquist pledge won’t apply,” Murray said. “So it puts the Republicans in a better box. But I think there’s a growing understanding among Republicans that putting us in that position doesn’t help them at all, the country at all, and does put us in jeopardy.”

Labor and other Democratic-leaning groups are also agitating for the White House to resist cuts in such entitlement programs as Medicare and Medicaid as the price of a compromise.

“It’s really clear to me that we can avoid the cliff,” said Rep. Donna Edwards, D-Md., but if Republicans won’t agree to higher taxes for the wealthy, “the president might be in a better bargaining position at the beginning of the year.”

Thelma and Louise

Republican leaders have accused Democrats of practicing “Thelma and Louise economics,” referring to the 1991 movie that ends with two female outlaws driving their convertible off a cliff.

Still, they are chastened by their losses in this month’s elections and cognizant of polls that show the public would consider Republicans more to blame than Democrats for a failure to avert the fiscal cliff. They are working to remake their image and show they are ready to find a bipartisan solution.

“I’m going to do everything I can to avoid putting the American economy and the American people through the fiasco of going over the fiscal cliff,” Boehner told reporters Thursday, calling it “serious business.”

While the cliff-divers in both parties are a minority now, their ranks could grow as the specifics of a deal come into view, said analysts on both sides of the debate.

“You’re going to see a calculation on the part of many Republican members about whether going over the cliff is worse than a bad deal,” said Brian Darling, of the Heritage Foundation, a Washington-based group that advocates smaller government. “Congress is very sensitive to the gyrations of Wall Street, and as we get closer to the cliff, if Wall Street starts panicking, we will start to see them putting their noses to the grindstone to get something done, even if it’s not very good. If that’s the case, why not go over the cliff, make the president own it, and then the fight continues next year?”

Adam Green, the co-founder of the Progressive Change Campaign Committee, a group that backed the winning Senate campaigns of Democrats Elizabeth Warren and Tammy Baldwin this year, agrees.

“The main priority has to be fighting for the will of the people, and if they’re able to accomplish that in a deal before the New Year that would be great; but if not, they have to be willing to go past the first of the year,” he said in an interview.

A recent poll his organization commissioned in the presidential primary state of New Hampshire found that the public is overwhelmingly opposed to cutting Social Security, Medicare and Medicaid benefits and backs tax increases for households earning $250,000 annually, he said. Democrats say changes to Social Security are off the table during the fiscal-cliff talks.

Green argued the very concept of a fiscal cliff is a ruse concocted by Republicans and corporations to pressure Democrats into surrendering their leverage in the debate.

“We think that even the words ‘fiscal cliff’ are a canard,” Green said. “We’re in a very rare situation where, if nothing happens, Democrats do better.”

With assistance from Michael P. Regan, Inyoung Hwang and Jeff Sutherland in New York.

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