The "cliff" was born from the idea that Congress could impose a deadline on itself, hanging an unpleasant combination of spending cuts over its own head. In 2011, when President Obama and congressional leaders wrangled over a proposed increase to the debt limit, a maneuver Congress had typically done without any fuss, they couldn't agree on a deficit-reduction package that would satisfy GOP demands for fiscal restraint. So they created the now-infamous deficit-reduction "supercommittee," asked it to recommend a plan, and gave it an ultimatum: If you fail, automatic spending cuts will be triggered, half from defense, and half from discretionary domestic programs, mostly shielding mandatory entitlements, such as Social Security.
The committee failed, and Congress gave itself until 2013 to solve the problem, extending its own deadline before the set of "budget sequestration" spending caps would take effect.
Those cuts would save about $1.1 trillion over 10 years, the Congressional Budget Office estimated after Congress passed the law, the Budget Control Act, which created the cliff's spending ultimatum.
In 2013, that means defense programs would see a cut of $54 billion, according to the Center for Budget and Policy Priorities (CBPP)--but the Budget Control Act specifies that spending on the wars in Afghanistan and Iraq would be protected from any automatic cuts.
Entitlements wouldn't see the worst of it--but they wouldn't be exempt, either.
Outside of defense spending, $38.6 billion would be shaved, proportionally, from discretionary domestic spending programs other than veterans' medical care and Pell grants, according to CBPP. But Medicare would take a hit, with cuts to provider payments (theoretically protecting benefits) limited to 2 percent in any year. CBPP estimates $10.8 billion would be cut from Medicare providers in 2013. Another $5.2 billion in cuts would come from other mandatory programs, the largest being farm subsidies.
A handful of popular domestic programs would be exempt from any cuts, at all: Social Security, Medicaid, the Children's Health Insurance Program (CHIP), and food stamps.
The fallout of all this, analysts say, would be a swift economic downturn.
Thanks mostly to the tax increases, many have predicted an immediate economic slowdown. In August, the Congressional Budget Office forecasted that the cliff would bring the U.S. down to negative .5 percent economic growth for 2013. By the fourth quarter of next year, CBO predicted, unemployment would rise to 9.1 percent.
"The economy would shrink by about 3.9 percent in the just the first quarter alone," said Jason Peuquet, research director at the Center for a Responsible Federal Budget. "You can be pretty sure that after at least a couple weeks we'd be feeling those effects."
While the cuts would happen over 10 years, and while the tax hikes might not depress income so drastically over just a few weeks, Peuquet said the cliff would damage confidence in the country's ability to pay its debts over the long term.
On the one hand, going over the cliff might not really mean going over it. The Budget Control Act mandated spending caps over 10 years, but Congress writes the laws and makes the rules. After the president and lawmakers wriggled out of their self-imposed ultimatum to pass a deficit-reduction package in 2011, punting the deadline to today, it's conceivable that Washington will re-write its own rules again.
Taxes have been adjusted retroactively in the past, and it's not as if Congress can't pass a new tax law tomorrow that would reapply the 2012 rates. Liberals have proposed that we should go over the cliff, to force Republicans to argue against a tax cut for the middle class. Underpinning their argument is a sense that the cliff is at worst a facade, and at least malleable.
None of the cliff's upshots sound too good. On the other hand, if Washington wants to save money regardless of how it could affect the economy, allowing tax hikes and across-the-board cuts is one simple way to do it.