A deal between the Obama administration and Congressional Republicans that supersedes the Budget Control Act of 2011 and prevents the scheduled expiration of the so-called Bush tax cuts as well as payroll tax reductions will be positive for markets in the short term, though it won’t instantly boost what remains a sluggish economy.

At the same time, however, absence of a bargain, grand or otherwise, before Jan. 1, 2013, will not immediately drop the US economy into recession, nor will it tank markets. What it will do is increase pressure on policymakers on both sides of the aisle to come to agreement on long-term fiscal policy that preserves the nascent recovery and sets the US on a path to budget balance and deficit reduction.

In the kabuki-like world of modern Washington, DC, budget negotiations progress is being made. Speaker of the House John Boehner (R-OH) this week offered a counterproposal to the package of tax increases and spending measures tabled last week by Treasury Secretary Tim Geithner, the administration’s point-man.

Mr. Obama’s opening gambit, variously described by GOP partisans as “unrealistic” and “worse than the terms under which General Lee surrendered at Appomattox,” left Mr. Boehner “flabbergasted.” The Speaker of the House, meanwhile, submitted a solution that White House officials characterized as not serious enough to merit a counter-proposal.

The White House offered a framework last week that included USD1.6 trillion in new taxes. Mr. Obama would continue individual income tax cuts originally enacted under President George W. Bush for all but the wealthiest earners. The White House proposal would delay across-the-board spending cuts for a year. In exchange the administration agreed to make USD600 billion in spending cuts to entitlement programs.

The administration also sought USD200 billion in economic stimulus from a combination of investments including infrastructure spending, extension of a payroll tax cut and jobless benefits. Negotiators also sought the ability to raise the nation’s borrowing limit unilaterally. At present, Congress must approve an increase in the debt ceiling.

The GOP proposal includes USD2.2 trillion in deficit savings over the next decade, USD800 billion from tax reform, USD600 billion from Medicare reforms and other unspecified health care program savings, USD300 billion in other unspecified spending cuts, tying cost-of-living increases for federal benefit programs to the Consumer Price Index to get savings of USD200 billion and further unspecified savings to domestic spending programs of USD300 billion.

When counting deficit reductions enacted last year, anticipated savings from winding down the wars in Iraq and Afghanistan and some interest savings, the package would amount to USD4.6 trillion in reductions over a decade, according to House Republicans.

These respective high-profile announcements have been met with equally high-profile public reactions, all of it suggesting the US is headed for a Wile E. Coyote-style plunge come the New Year.

But an unnamed GOP aide summed up the quieter aspects of this brand of theater in a report by The Huffington Post: “Everybody in Washington knows there’s certain choreographed steps that you have to go through when you have to get a deal, and part of that is the public admonitions of the other side. But we don’t want to take us off the cliff. We do want a deal.”

In the same report an administration official noted that Mr. Boehner’s proposal marked a “measure of progress.”

There is significant ground on which to negotiate from here.

The GOP’s proposal to change in the way the inflation is measured violates Mr. Obama’s requirement that reforms to Social Security be taken up outside of the fiscal cliff negotiations. But a separate Republican proposal to increase the eligibility age of Medicare may be more palatable, so long as it’s done over the course of several decades. The president agreed to a similar proposal when he and Mr. Boehner attempted to negotiate a grand bargain in the summer of 2011.

The White House has called for additional stimulus spending, which won’t pass the smell test in the House of Representatives. The president has also asked that power to extend the federal debt ceiling be transferred to the executive from the legislative branch. Several congressional Democratic aides that spoke to the Huffington Post predicted the White House would sacrifice this provision.

Mr. Obama’s proposal, characterized by the White House as a “framework” for negotiations, included nothing concrete about taxation of publicly traded partnerships. It is likely, however, that the set of changes described generally in the February 2012 “President’s Framework for Business Tax Reform” will be part of the negotiations over the USD600 billion in tax increases conceived to take effect in 2014 as a result of broader tax reform.

The primary sticking point in the short term will be how to achieve the revenue increases both sides have included in their respective proposals. Mr. Boehner’s path is through the elimination of loopholes and deductions. Mr. Obama would raise rates on top earners back to Clinton-era levels.

According to more “behind the scenes” reporting by Politico, Republicans “know” that rates “are going up,” if not all the way to 39.6 percent for the highest bracket “then darn close” to that level. Mr. Obama’s position in rates for the highest earners is inflexible. He will, however, listen to GOP proposals to achieve more revenue through closing of loopholes and deductions when the discussion on broader tax reform takes place in 2013.

As the Center on Budget and Policy Priorities has noted, “The sooner policymakers enact legislation to put the budget on a sustainable long-term path without threatening the vulnerable economic recovery, the better.” It’s important, however, that negotiations and decisions with long-term consequences not be colored by the fevered calls for a quick turn before the US falls off some allegorical precipice.

Despite what CNBC and its ominous “Fiscal Cliff Countdown Clock” may suggest, the economy will not plunge into another Great Recession in early 2013 if the tax and spending changes required under current law actually take effect because policymakers haven’t yet worked out a budget agreement.

What we’re dealing with is more “slope” than “cliff.” If no deal is reached during the current “lame duck” session of Congress, the federal budget will shrink dramatically from fiscal 2012 and fiscal 2013, the scheduled expiration of tax cuts and imposition of spending cuts actually leading to a reduction in the deficit. But this reduction in the deficit would slow the economy, according the Congressional Budget Office (CBO) likely creating a recession next year. 

But even under that scenario there will be no steep plunge in January. Rather, most households would receive somewhat smaller paychecks due to higher income tax rates and the expiration of the payroll tax cut. But the impact on their cash flow would play out over the year rather than being concentrated in January.

Already, however, there is support from both Republicans and Democrats for extending most of the middle-income tax cuts through 2013. The impact of a temporary expiration of the tax cuts on consumer spending is likely to be modest, given the very high likelihood that lawmakers will end up extending them retroactively to Jan. 1, 2013 if they haven’t acted by New Year’s Day. 

In a May 2012 report researchers at the Carlyle Group found that “virtually every macroeconomic analyst’s preferred outcome would be a ‘Grand Bargain’ that replaces the fiscal cliff with a credible alternative that phases-in the deficit reduction over a period of years.” The authors further noted that:

…should a negotiated settlement on long-run deficit reduction fail to materialize during the lame duck session, the most likely alternative might be a simple extension of current fiscal policy. While such an outcome would improve the near-term economic growth prospects, it would also relieve the pressure to agree to credible deficit reduction and substantially worsen the longer-run outlook. The best outcome, therefore, might be the expiration of current fiscal policies to create real pressure for both parties to work together and quickly reach a “Grand Bargain.”

The CBO estimates that the budget deficit would fall by USD560 billion–or 3.7 percent of gross domestic product (GDP)–between fiscal 2012 and fiscal 2013 current tax and spending laws take permanent effect. And because such changes are concentrated around the beginning of 2013 the deficit would fall by a somewhat larger amount–4.7 percent of GDP–if measured on a calendar-year basis, from December 2012 through December 2013.

The economy would contract at a 1.3 percent annual rate in the first half of 2013, according to the CBO, before growing at a 2.3 percent annual rate in the second half of the year. Real GDP would grow by 0.5 percent from the end of 2012 to the end of 2013, and unemployment would rise.

Based on these assumptions the National Bureau of Economic Research would likely conclude that the economy was in recession in the first half of 2013.

But the widely cited CBO report on the “fiscal cliff” and its recessionary impact spends at least as much time addressing the trade-offs involved in adopting policies to avoid this worst-case short-term outcome. And, whether it happens by Jan. 1 or shortly thereafter, Washington is very likely to come to an agreement.

What’s in question is whether the administration and Congress will respond to melodramatic financial infotainment graphics and simply extend current policies and postpone the hard decisions needed to restore long-term fiscal stability or if leadership will in fact do something grand for the country.