The Congressional Budget Office (CBO) released a soberingreport last month entitled Economic Effects of Reducing theFiscal Restraint That Is Scheduled to Occur in 2013. Itreminds all that in the absence of some action, the nation facesautomatic spending cuts and tax increase in January—a “fiscalcliff,” to use the phrase popularized by Federal Reserve ChairmanBen Bernanke—that would likely turn the already weak economicrecovery to recession. It is hard to argue with the CBO'sconclusions on the economic effects, but it is still reasonable toask if even this Congress, even in a lame duck session after theelection, would allow such a thing to happen. Probabilities suggestthe answer to that question is “no,” that Congress will avoideconomic suicide, allowing the economy's admittedly ploddingrecovery to continue.

The CBO report identifies eight elements of this looming fiscaldrag: five automatic tax hikes and three automatic spending cuts.It estimates their total impact for fiscal 2013 at $607 billion orsome 4% of GDP, enough to turn positive growth negative.

Scheduled tax hikes amount to $399 billion, some two-thirds ofthe total. These include $221 billion from the expiration of theBush tax cuts and last year's decision not to limit the reach ofalternative minimum tax (AMT). The AMT matter applies to 2012earnings but will burden taxpayers' cash flows only after theycalculate their full liability in 2013. Also scheduled is anautomatic $95 billion tax hike from the expiration of the twopercentage-point payroll tax holiday; a $65 billion tax increasefrom the expiration of rules allowing businesses to expenseinvestment property; and an $18 billion hike, built into 2010'sObamacare legislation, on the earnings of high-income taxpayers.

On the spending side, there are $208 billion in cuts andscheduled fee increases. These include the so-called sequestrationof discretionary spending, mandated by the Budget Control Act thatemerged last year from the debt ceiling debate, which would cutsome $65 billion out of federal spending for the year. The end ofextended unemployment benefits, according to the CBO, should cut$26 billion, and the scheduled reduction in payments to doctorsunder Medicare should cut another $11 billion. A large number ofsmaller items, also scheduled to go into effect in 2013, sum to anadditional $105 billion in spending restraint.

If this fiscal restraint is allowed to go forward, the CBOestimates that it would precipitate a recession in the first halfof 2013, with real GDP dropping at a 1.3% annual rate. A modestrecovery during the second half would allow, by CBO calculations, amere 0.5% growth for the year as a whole, down from an earlier CBOforecast of 1.1% real GDP growth in 2013.

Since even Congress cannot ignore such a dire prospect, it'slikely representatives and senators will take action to stop orpostpone these otherwise automatic effects. Doubtless they willwait for a lame duck session after the election. The give-and-takeof compromise on these points is much too politically explosive forany of them to deal with before election day. But later in Novemberand in December, there is ample time for Washington to generate atleast a temporary fix to avoid driving the economy off thiscliff.

Congress can easily postpone the spending cuts that arescheduled. Last year's Budget Control Act is, after all, a productof Congress and subject to its subsequent votes. Legislators couldeasily push sequestration out for at least a year and perhapsindefinitely. Similarly, Congress should have little troublepostponing the reduction in doctors' payments. This postponementhas become an annual event, in fact, so regular that it hasacquired the nickname “doc fix.” And Congress should have littledifficulty softening the end of extended unemployment benefits.They were part of a fiscal compromise in 2010. A gradual decay inthe amount of required spending seems a plausible approach.

The tax side is more complex but not insurmountable. The partiesare farthest apart on the expiration of the Bush tax cuts.Democrats want to continue the tax relief only for lower-incomepeople, those individuals who make less than $200,000 a year andthose couples who make less than $250,000 a year. Republicans wantto continue the tax relief for all. Since all the tax relief wouldotherwise disappear automatically, the Republicans will threaten,as they did when this came up in 2010, to vote down anything butcomplete renewal.

Despite the appearance here of an impasse, tax reform mightoffer a way out. In recent years, both Republicans and Democratshave proposed reforms that would reduce the statutory rate andbroaden the tax base by eliminating tax breaks and credits. Thesecould appeal, especially when neither party has the luxury ofinaction. A reform effort would enable either party to sidestep AMTand Obamacare tax matters. Because of the impasse over the Bush taxcuts, reform would also enable both parties to avoid the label oftax increases. For Republicans, reform would further appeal byoffering elements of the growth-oriented tax efficiencies that theparty has embraced in the past, most recently in the Ryan plan.Republicans might even allow a net tax increase, if associated withreforms that would allow them to offer their constituents a drop inthe statutory rate. Tax reforms would allow Democrats to sidestepaccusations of class warfare and avoid the risk that an impassewould force tax hikes on their lower-income constituencies. Theyalso would embrace the broadening, since, rhetoric aside, they knowthat tax hikes on the wealthy alone cannot close the budgetgap.

More cynically, even if Congress is still far from agreement,discussion of reform could serve as an excuse to avoid the cliff.Both sides could claim they will accept a continuation of currentlaw for some months or a year in order to work out the details ofmore serious and lasting tax reform. It would at least avoid theappearance of kicking the can down the road. If they're sincere,the country might actually get a more efficient, simpler, moregrowth-oriented tax code. If discussion of reform is a pose toavoid a difficult vote, it would at least keep the economy fromdriving off the “fiscal cliff.” In either case, the recovery missesthe downside, which the CBO has detailed, and continues itsotherwise plodding recovery.