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Five reasons America won't fall off the 'fiscal cliff'

The political and economic ramifications are too big for Washington to let the large tax increases and spending cuts take effect. But this doesn't necessarily mean lawmakers will craft a decisive solution to the nation's fiscal woes.

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The markets have already been registering their views over this fiscal pivot point, as they did over earlier ones. In the first week after the election, the Standard & Poor's 500 index sank 2.3 percent, in part over anxiety about the higher tax rates on capital gains and dividends if the fiscal cliff isn't fixed.

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  • Collision points
  • 4 possible outcomes

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In 2008, after the House rejected the bank bailout plan (the Troubled Asset Relief Program, or TARP), the Dow Jones Industrial Average dropped more than 700 points. When the legislation returned to the floor days later, the bill drew nearly 60 new supporters and the legislation passed.

"These catastrophic market moves had a major inspirational effect in getting Congress to act," says Mr. Glickman, who is also a former member of the House from Kansas. "The markets are a big factor in this. [Their impact] may be psychological, but if the markets lose confidence I think Congress becomes more reactive to that."

Because of the sharpness of the paring knife.

The cliff, unresolved, would enforce about $100 billion in infamous "sequestration cuts." About half of that would come from military spending and the rest from across-the-board trims in "discretionary" programs, with the exception of a few things like Social Security, veterans' benefits, and children's health insurance. Groups all across the political spectrum are lining up to prevent the indiscriminate pruning. Republicans don't like the huge cuts to military spending, which would amount to about 10 percent, nor do some Democrats, including Defense Secretary Leon Panetta, who has said it would lead to substantial job losses and reductions in major weapons programs.

Federal emergency assistance would be cut about 8 percent, something that would be difficult even without the sodden destruction of superstorm Sandy. The Secret Service, highway funding, health research, air-traffic controllers, the FBI, environmental protection – outlays for all these would be slashed and all have their constituencies.

"Across-the-board cuts are not policy – they are arithmetic," says Tim Westmoreland, a visiting professor at Georgetown Law School and former counsel to the House Subcommittee on Health and the Environment. "They are less than mindless."

This was the intention, of course, to goad lawmakers into making "responsible" spending cuts, under the threat of irresponsible ones. Will it work? At least many in Washington are complaining about the reckless nature of the trims, though that is a long way from being able to agree on which programs to pare back.

Because of the changing political calculus.

One popular view in Washington has been that the election changed nothing. The same parties hang onto the same institutions. Commentators bicker over just what constitutes a mandate – was Mr. Obama's win big enough? What about voters returning a Republican majority in the House?

Yet many lawmakers on Capitol Hill have read the election as an order from the American people: Work together. The question is whether it will translate into a deal on the fiscal cliff. Certainly both parties have at least some incentive to get something done.


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