Forget politics. Bush tax cuts still loom

Handshakes are on hold.

NEW YORK (CNNMoney) -- Washington awoke with hair on fire Wednesday after media reports -- many of which later required corrections -- suggested that the Democratic Party was suddenly split over extending the Bush tax cuts.

Bill Clinton's interview Tuesday on CNBC came first. The former president suggested that a temporary extension of the tax cuts would be an acceptable -- and indeed the most likely -- outcome of talks over the expiring tax cuts. (He soon walked his statement back.)

Former Obama economic adviser Larry Summers was next, as the press turned a muddled automotive metaphor on Wednesday morning into a call for extending the tax cuts. The fact is Summers never called for such a thing during his interview on MSNBC.

Flash-fire controversy and political point-scoring aside, a key fact remains: The principal negotiators on the Bush tax cuts haven't changed their positions.

President Obama still wants to let the tax breaks expire as scheduled for those making more than $250,000 a year. And congressional Republicans remain opposed to raising taxes.

House Speaker John Boehner hasn't changed his mind, and neither has Obama.

And here's the thing: Lawmakers would do well to dispense with the rhetoric and get on with the policy compromises that nearly all recognize are necessary.

The so-called fiscal cliff -- a series of measures set to begin in January that would take more than $500 billion out of the economy in 2013 alone -- is bearing down.

The "cliff" includes the expiration of the Bush tax cuts, middle class protection from the Alternative Minimum Tax, and more than 50 "temporary" tax breaks for individuals and businesses that are set to run out.

It also includes nearly $1 trillion in blunt spending cuts across many areas of the federal budget. These would take a significant bite out of defense and non-defense spending.

A number of stimulus measures -- such as the payroll tax cut and extended unemployment benefits -- will also be ending.

Economists and the Congressional Budget Office predict the United States could fall into a recession if the tax hikes and spending cuts take effect all at once.

The general consensus in Washington is that lawmakers will strike some kind of deal before the end of the year -- but they will likely wait until the last minute.

The timing of the election plays a big role in this calculus. A sweeping victory for either party in November could propel them to a position of power when negotiations start in earnest.

But it's not clear that the economy can wait that long.

Friday's disappointing jobs report provided fresh evidence that the domestic labor market is floundering. Unemployment in the eurozone just hit a record 11%. And economic growth in China is rapidly slowing.

Markets are reacting in a way that clearly registers the fears of investors. Treasury yields are near an all-time low. Stock markets around the world are selling off.

One way to help the economy would be some sort of early compromise on tax and policy issues. But don't count on it.

David Kendall, a senior fellow who studies fiscal policy at the centrist Democratic think tank Third Way, said there is little chance for a compromise before the election.

"We are now seeing the pre-negotiations," Kendall said. "It's all part of the process. Whoever gets the upper hand in the pre-negotiations will have an advantage later on."