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By Jason Stipp and Robert Johnson, CFA | 01-02-2013 11:00 AM

What the Cliff Compromise Means for the Economy

Congress' last-minute deal cut the so-called fiscal cliff in half, lessening economic headwinds in the short term, but much work remains to address longer-term debt and deficit issues, says Morningstar's Bob Johnson.

Jason Stipp: I'm Jason Stipp for Morningstar.

Congress was able to come to a last-minute deal to avert most of the fiscal cliff, at least some of it temporarily, but what's still left to do? There is plenty of work.

Here to offer his insight is Morningstar director of economic analysis Bob Johnson.

Bob, thanks for being here.

Bob Johnson: Nice to be here.

Stipp: Congress did manage to get to a last-minute deal to avert a lot of what was in that original fiscal cliff. Let's first talk about the things they removed from the cliff that won't be headwinds on the economy in the next year. There are a few items they managed to get done.

Johnson: Yes. The unemployment extension, they left that in there. They felt that maybe there were people who were going to suddenly have nothing … as many as 2 million people, and they decided maybe that was a little bit too much. So, they managed to extend the unemployment, so that disappeared from the cliff.

[Tax cuts for the non-wealthy] got extended. That was the biggest worry about the fiscal cliff, and I always projected that was never, ever going to happen, and it did not. So that was removed from the cliff.

Medicare payments to doctors, which is always in debate every year, we didn't go over the cliff on that.

The alternative minimum tax: They actually I think fixed that one permanently. I think they put the number in there and put an annual inflation rate in there. So, the AMT, which was a huge part of the cliff for both 2012 and '13, went away [for the large group of taxpayers who would have been susceptible without fixing the inflation patch].

So, they took the worst of the stuff out of the cliff.

Stipp: And there was also some business tax credits that they removed from the cliff, and those will still stay in effect, but not necessarily forever?

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