Wall Street Journal (12/04/12) Sudeep Reddy

While some economists and Democratic lawmakers say the White House and Congress could wait until January to complete a deal on the “fiscal cliff” without doing much harm to the economy, critics of that strategy warn that going over the cliff even temporarily could hurt the economy in some important intangible ways, such as damaging confidence and prompting sharp market declines.

Some economists prefer the term “fiscal slope” to “fiscal cliff” because most of the direct economic effects would be gradual. The Congressional Budget Office forecasts a recession next year only if the tax increases and spending cuts continue for months. Also, the Obama administration has some leeway to delay spending cuts and change tax withholding from paychecks if officials expect to reach a deal early next year. However, if investors start to doubt that a deal will be reached, the consequences could prove severe and difficult to reverse. Such doubts could spark broad selloffs, causing consumers and businesses to retrench, damping investment and job creation. Alan Krueger, chairman of the White House Council of Economic Advisers, cautions that a quick trip over the cliff would likely hurt confidence and the economy over time.