Image: Fiscal cliff © Steve McAlister, Getty Images

As the hard-fought campaign moves toward an uncertain finale next week, President Barak Obama and Republican challenger Mitt Romney have begun offering solid clues as to how they would defuse a looming year-end fiscal calamity that many experts fear could send the struggling economy back into a recession.

Washington is awash with speculation and anxiety about the looming fiscal cliff of massive tax increases and spending cuts that awaits congressional action shortly after Tuesday's election. While there are many scenarios for how negotiations might play out in a sorely divided government, the path to resolution may be much simpler than many suspect once the votes are counted.

Obama envisions a $4 trillion bipartisan "grand bargain" of entitlement and tax reforms, spending cuts and tax increases on the wealthiest Americans to solve the country's long-term debt problem while averting a jarring year-end panoply of expiring tax cuts and defense and domestic spending reductions totaling $607 billion. Obama's last bid for a "grand bargain" was his failed secret talks with House Speaker John Boehner, R-Ohio, that collapsed in recriminations.

"It will probably be messy," the president told the Des Moines Register last week. "It won't be pleasant. But I am absolutely confident that we can get what is the equivalent of the grand bargain that I've been offering to the Republicans for a very long time."

Romney is dismissive of grand bargains and opposes tax hikes on the wealthy. He says that if elected, he wants Congress and Obama to delay any permanent solutions until after the inauguration in late January, and has suggested he would be open to fixing the problem with a series of separate bills.

Both men favor derailing the more than $50 billion of defense cuts set to take effect automatically in early January under budget sequestration. The two also agree that a stopgap measure is needed before Jan. 1 to temporarily extend Bush-era tax cuts and other measures set to expire. However, Obama has signaled his intent to veto even a few months' extension of tax cuts unless families earning more than $250,000 a year are made to pay higher rates.

The tax conundrum

Taxes have been the flash point in Obama's dealings with Republicans during the past two years. Romney, House Speaker John Boehner, R-Ohio, and Senate Minority Leader Mitch McConnell, R-Ky., insist that the Bush tax cuts be extended for all Americans, arguing that any increase in rates would discourage investments and job expansion by small businesses.

If Obama were to lose, it remains to be seen would make good on his veto threat during a lame duck session, although he would likely find it difficult to defend that position if Romney and the GOP sweep to victory and claim a mandate for their economic and budget policies

"If Obama is re-elected, he will have to negotiate with a Republican House of Representatives whose leaders aren't sure they can do business with him and whose views are diametrically opposed to his own," said William Galston, a former senior policy adviser to President Bill Clinton. "So if Obama wants to make progress on fiscal questions or any other questions, he is going to have to consider hard compromises -- that is to say the kind of compromise that all parties agree to something, pieces of which each party fundamentally disagrees with."

If Romney wins, Galston added, "The Republicans will have a very strong incentive to agree to as little as possible -- for as short a time as possible -- until the White House is under new management. And then the question is how much of a price will Senate Democrats force them to pay for that short-term deal."

Senate Majority Leader Harry Reid, of Nevada, Sen. Charles Schumer, of New York, and other Democratic leaders are closely allied with Obama in arguing that the wealthiest taxpayers should pay more to help bring down the deficit while maintaining essential government services for the middle class. The Democratic Senate is a counterweight to the House and would be the only thing standing in the way of a Republican agenda if Romney beats Obama next week. If Obama and the Senate Democrats prevail the political status quo will be maintained at least for the next two years.

Amid dire predictions about the economic impact of going over the fiscal cliff, it's important to remember that most leading economists say the odds of that happening are slim. Mark Zandi of Moody's Analytics, in a report issued in mid-September, projected there was only a 15% probability of going over the cliff. He gave a 30% probability to Congress and the White House extending all current policies for a time -- the "kick the can down the road" scenario. His most likely outcome -- a 55% probability -- is that some "middle ground" will be reached during the lame duck session.

Recession: How bad, how fast?

Even if Congress ignores the cliff during its lame duck session, most of its spending cuts, tax increases and cuts in physicians' Medicare pay could be quickly reversed in the next session, which gets under way in mid-January. The nonpartisan Congressional Budget Office's most dire prediction -- that the economy would contract by about 0.5% over the course of 2013 with unemployment rising to 9.2% from current levels -- assumes those policies will be in effect all year.

The recessionary effects of the full "cliff" would take time to filter through the economy. And if the new Congress and president reach a compromise on taxes and spending, it could easily reversed such a downturn. "The economy doesn't go over a cliff immediately," said Chad Stone, chief economist for the Center for Budget and Policy Priorities. "It starts slipping down a slope."

Businesses, however, have a different problem. They're in the final throes of annual budget planning, and that includes determining head count. If they believe the rollbacks and tax increases will take place, layoffs are inevitable at the start of their fiscal years, many of which begin Jan. 1.

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