The Year in Review 2012: U.S. economy poised to dive off 'fiscal cliff'

By MARCELLA KREITER, United Press International  |  Dec. 31, 2012 at 4:26 PM
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Grab your golden parachutes: The U.S. economy went cliff diving heading into 2013.

Odds caught up with President Obama and congressional Republicans, putting a deal to avert the tax hikes and spending cuts set to kick in Jan. 1 out of reach as 2012 drew to a close despite a flurry of last-minute meetings.

Politicians cut their Christmas vacations short -- Obama returning from Hawaii on a red-eye flight Dec. 27 -- to again tackle the cliff. An added worry that surfaced was Treasury Secretary Timothy Geithner's letter to Congress warning the United States would hit the $16.4 trillion debt ceiling New Year's Eve.

Default was not imminent, however, he said, because there were accounting tricks he could use to give the government a $200 billion cushion -- but the respite would not last forever, not even two months.

The smart money said it was likely Congress would allow the economy to go over what Federal Reserve Chairman Ben Bernanke dubbed the "fiscal cliff" because it would make it that much more politically palatable for Republicans to vote to lower taxes on those earning less than $250,000 -- a level on which Obama has been insisting but has signaled could rise slightly -- than to vote to allow taxes to rise on everything more than the first $250,000 earned.

With Dec. 31 half gone, Obama took to the airwaves to announce a framework had emerged in the Senate but cautioned the crisis had yet to be averted.

"We're very close," Obama said in outlining a deal that would allow taxes to rise on incomes of more than $450,000, increases the estate tax from 35 percent to 40 percent and extends unemployment insurance benefits. The sticking point was still spending cuts.

And as the sun began to wane on the last day of the year, word came the House would not vote before midnight, sending the economy over the cliff.

House Speaker John Boehner, R-Ohio, whose own last-ditch effort, known as Plan B, failed to earn support in his caucus, told the Senate it was up to the upper chamber to come up with a deal.

"Just as our economy is really starting to recover and we're starting to see optimistic signs, and we've seen actually some upside statistics from a whole range of areas including housing, now is not the time for more self-inflicted wounds -- certainly not those coming from Washington," Obama said before setting off for Christmas in Hawaii.

"I've asked leaders of Congress to work towards a package that prevents a tax hike on middle-class Americans, protects unemployment insurance for 2 million Americans, and lays the groundwork for further work on both growth and deficit reduction. ... And I will immediately sign that legislation into law, before Jan. 1 of next year. It's that simple."

Simple, maybe. Politically expedient for Republicans who adhere to Grover Norquist's no-new-taxes pledge? Not really.

On his way back to Washington, Obama telephoned Boehner, House Minority Leader Nancy Pelosi, D-Calif., Senate Majority Leader Harry Reid, D-Nev., and Senate Minority Leader Mitch McConnell, R-Ky. They met Dec. 28.

As recently as the last Friday of the year, Obama expressed optimism a deal would get done. But by Saturday's taping of "Meet the Press," Obama expressed doubts.

"Now if we have raised some revenue by the wealthy paying a little bit more, that would be sufficient to turn off what's called the sequester, these automatic spending cuts, and that also would have a better outcome for our economy long-term," Obama said. "But so far, at least, Congress has not been able to get this stuff done. Not because Democrats in Congress don't want to go ahead and cooperate, but because I think it's been very hard for Speaker Boehner and Republican Leader McConnell to accept the fact that taxes on the wealthiest Americans should go up a little bit, as part of an overall deficit reduction package."

The optimism, however, was back by Monday.

"It appears that an agreement to prevent this New Year's tax hike is within sight," Obama said. He pointed out, however, "they're not there yet. They are close, but they're not there yet."

Obama said he was disappointed the grand bargain he had envisioned earlier in the year would not be achieved.

"But with this Congress, that was obviously a little too much to hope for at this time," he said.

Before the last-minute flurry of activity, Reid took a personal swipe at the House speaker.

"John Boehner seems to care more about keeping his speakership than keeping the nation on a firm financial footing," Reid said. "It's obvious what's going on. He's waiting until Jan. 3 to get re-elected to speaker because he has so many people over there that won't follow what he wants."

Boehner spokesman Michael Steel responded essentially by telling Reid to stuff it -- an example of the partisan rancor that virtually has paralyzed the 112th Congress.

"Senator Reid should talk less and legislate more," Steel said. "The House has already passed legislation to avoid the entire fiscal cliff. Senate Democrats have not."

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