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Beware the Fiscal Speed Bump; How The Cliff Could Be Defused


In science it would be considered a given. Something that is already known and proven, such as the temperature at which water boils, and therefore does not need to be revisited.

But in Washington, as much as everybody knows that if lawmakers allow the country to take the full hit of pending tax increases and budget cuts that our economy would go over the fiscal cliff and into recession, we still keep revisiting issue - if only to reassure ourselves that even Congress isn't THAT reckless.

The point is, we get it. Ben Bernanke knows, the President knows, the CBO knows, my cab driver knows. The cliff is simply not an option.

And so, the logical bet is it won't happen, which is why economist Alan Levenson of T. Rowe Price sees the daunting cliff getting whittled down to nearly nothing.

"So you're left with items that are worth about 1.5% of GDP," Levenson says in the attached video. "It's a manageable speed bump to go over without braking an axle."

As he sees it, there are some key components to the mend: Adjusting the alternative minimum tax, tweaking medicare reimbursements (aka the Doc Fix), as well as several other little tax expenditures. Then they will extend the middle income tax cuts from the Bush era and then put off the automatic spending cuts.

"They'll hand the hard work to the next congress," he says, predicting that perhaps a ''baby grand bargain rather than a concert grand bargain'' might be reached that would see at least some down payment on a $4 trillion ten year deal.

Part of his outlook is based on the political realities of second term Presidents that don't need to tend as much to their support base, as well as what he calls a growing recognition on the Republican side that there's going to have to be revenue increases.

Add it all up and you get a disaster avoided, the possibility of a modest deal being struck, and barring any major worsening of the crisis in Europe, another year of sub-par GDP growth but no recession.