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'Cliff' Dive Could Unleash 'Chaos': Economists

Thursday, 29 Nov 2012 | 12:13 PM ET

"Chaos" may ensue if politicians cannot reach a deal on averting the "fiscal cliff" at the end of the year, a top Democratic economist warned on Thursday.

Colin Anderson | Photographer's Choice | Getty Images

Alice Rivlin — a veteran of the Congressional Budget Office and the Federal Reserve who sat on two separate presidential debt commissions, told CNBC's "Squawk on the Street" that she expects both Democrats and Republicans to forge a solution.

"The outlines of a bargain between the two parties are there," she said. "That they can put a framework in place before the end of the year that will allow them to avoid the cliff, and then get into serious negotiation of the details of the bargain within this framework." (Read More: Obama: Let's Get 'Fiscal Cliff' Deal Before Christmas.)

Still, however, she warned of dire days ahead should the White House and Congress punt on a deal.

"I don't see how it can really fail because everyone stands to lose if we go over the cliff," Rivlin said. She added that with the election now over, both sides want to reach a deal because "we could have chaos if we don't get one."

Harvard economist Gregory Mankiw also cautioned about the serious consequences for the economy if the country goes off the cliff.

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"I think if we go over for a couple of weeks and they change some things retroactively, it could be minor," Mankiw, who served in George W. Bush's administration, told CNBC in a "Squawk Box" interview.

"I think the question is whether they'd go over substantially. I think that would be potentially catastrophic for the unemployment situation, which is already still weak." (Read More: 'Fiscal Cliff' Could Put Millions of Taxpayers into 'AMT Shock'.)

Both Rivlin and Mankiw agreed on the need for tax reform, in particular changing the mortgage interest deduction.

"The mortgage interest deduction, I know is politically sacrosanct, but it's really not good policy," Mankiw said. "What it does is encourages too much of the nation's capital stock to be allocated to residential rather than business capital and it's not particularly fair because it tends to go to high income people like me." (Read more: Mortgage 'Attack' Could Mark Sea Change: Shiller.)

Rivlin, a member of both the Simpson-Bowles and Domenici-Rivlin debt commissions, supports phasing out the mortgage interest deduction and replacing it with a credit. There's also room for corporate tax reform to make the U.S. corporate tax rate more competitive with the rest of the world, she said.

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"I think that broadening the base of the corporate income tax is also a good idea, getting rid of a lot of special provisions that riddle the tax and make it more complicated," Rivlin said.

While both economists see a path to compromise, key congressional leaders continue to play a high stakes game of chicken, Mankiw said.

"I think what we see now [are] these two cars hurtling toward each other," Mankiw said, "and the question is who's going to swerve."

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