Obama talks 'fiscal cliff.' Why the urgency to reach deal sooner, not later?
But here's where the timing issue enters in.
The economists also considered three scenarios for the bargaining process in Washington: one in which a fix is fully crafted and takes effect on Jan. 1, one in which Congress takes a multistage approach (delaying most of the cliff for a few months and then crafting a permanent deal in the new year), or a retroactive fix, in which the economy goes fully over the cliff in January, and then Congress attempts to reverse many of the effects after the fact.
In the analysis by Bank of America Merrill Lynch, led by economist Ethan Harris, delay proves costly to the economy. Regardless of the cliff's size (the small, medium, or large scenarios), economic growth could be negative during the first half of next year if Congress deals with the issue retroactively.
"At one extreme, if the whole cliff is resolved before year-end and the [spending] cuts are modest, the economy survives largely unscathed," growing at a 2.5 percent pace in the first half of 2013, Mr. Harris and his team write. "At the other extreme, going over the Cliff for two months ... results in a mild recession," even if a medium-size effort to reduce the cliff is enacted retroactively.
Taking no action at all would be even worse, many economists say. The Congressional Budget Office has estimated that unemployment would jump to 9.1 percent next year in that case.
The coming changes to fiscal policy can affect the economy in a few important ways.