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Fiscal Cliff Even Higher Than First Thought

According to the Financial Times, a new report from the nonpartisan Congressional Budget Office says that its original calculations of the impact of the fiscal cliff significantly understated the risks and the situation is  far worse than it thought:

The US will be plunged into recession next year if Congress fails to strike a deal to avert the looming “fiscal cliff”, with the economy contracting at a rate of 0.5 per cent in 2013, according to congressional analysts.

The projection by the Congressional Budget Office is substantially bleaker than its projection at the end of May, in which it forecast that the US economy could suffer a recession early next year but would rebound strongly enough in the second half to ensure tepid growth of 0.5 per cent for the full calendar year.

The U.S. economy will tumble over the fiscal cliff—a catastrophic, simultaneous combination of expiring tax cuts and automatic spending cuts—on January 1 unless a bipartisan deal is reached. Voters need to push every politician running for national office to explain exactly what they intend to do to prevent an entirely artificial and unnecessary disaster from engulfing the land.

But as the magic date approaches, we are likely to see some precursor effects. A business that sees a 50/50 chance of a recession starting in January isn’t going to spend a lot of money in September. Consumers are less likely to make big ticket purchases, and small businessmen will start curtailing their hiring well before the New Year.

This probably does not mean we can expect quick action from our political class, however. Reach for the life jackets, America. The politicians are steering us straight for the rocks.

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  • Art Deco

    An economic contraction of 0.5% is one we can survive.

    One of the complaints about the stimulus is that the spending had a low multiplier (which was predicted by antecedent critics of it). You think that might apply in the opposite direction?

  • Mrs. Davis

    Please mark me down as a dissenter on this one.

    1. We are in the early stages of the second dip in what ultimately will be seen as the second great depression. Check today’s jobless numbers. Read the article below about Chinese steel prices. Look at the Euro situation. Sequestration is not going to push us into recession alone.

    2. Our government is spending irresponsibly and racking up debt at an unsustainable rate. At some point we will go Greek. Government spending needs to decelerate. Now. It will never be painless, but the longer we put it off, the more painful it will be. Sequestration may be a blunt tool, but if it is the only tool in the cabinet, it should be used. Give me sequestration or get more debt.

  • Kenny

    And when the U.S. falls into recession, the FEB will print its a** off and gold and silver will soar.

  • cacrucil

    “The politicians are steering us straight for the rocks.” By saying “politicians” you mean the tea party in the house. Right? They are the ones responsible.

  • Jim.

    Economic structures (businesses, supply chains, etc) that are independent of unsustainable spending patterns (i.e., debt-financed spending, public or private) need to be established.

    It is not clear that continued Keynesian spending is doing anything other than prolonging the existence of dependent and thus unsustainable economic structures.

    Knocking down the unsustainable structures and letting something else grow in their place may be painful in the short term, but it may be the only strategy with any chance of success.

    It’s looking more likely than what we’re currently doing, anyway. Have you seen the normal response to recession, back before we had all sorts of too-clever Keynesians running the public finances? 18 months, 24 at most, and things are roaring ahead again.

  • bill phelps

    The Federal Government is funding around 60% of its operatios with debt. The rational solution, to me, is to reduce expenditures and raise taxes. Let the fiscal cliff happen. Recessions eventually end.

  • f1b0nacc1


    Why do you suggest that the Tea Party is solely responsible for this standoff? Last I checked, the GOP (which is a whole lot bigger than just the Tea Party) has offered several pieces of legislation to address the fiscal cliff, but has run into an absolute stonewall by the Administration and the Senate Democrats (note: Harry Reid refuses to even bring much of the relevant legislation up for a vote…why do you think that is?) who are demanding higher taxes on ‘the wealthy’ as a precondition for any negotiation whatsoever.

    I am with Mrs. Davis on this one…sequestration may be a blunt tool, but given the intransigence of the Democrats, it seems to be the only tool left. Obama is obsessed with raising taxes on the top earners (who also happen to be the top job creators as well as the only group that already pays more than their fair share of taxes), and is resolutely against any meaningful adjustments in the insane levels of spending that he has instituted. Pretending that this problem (>$15 trillion in debt and counting) is going to just go away isn’t realistic or responsible, as is somehow suggesting that marginal tax increases on the one group that is already taxed heavily (how is this strategy working out in California?) can solve the problem.

    If the Dems were willing to come to the table with meaningful spending cuts FIRST, I would see the point in THEN discussing adjustments to the overall tax structure (broadening the base, for instances, strikes me as an excellent approach, particularly if it were combined with a lowering of rates to compensate), but the spending cuts must come first. The Dems have shown bad faith in every discussion of spending going back decades, and whether they want to acknowlege it or not, no serious person concerned about spending takes them seriously. Cut spending (and that means real cuts, not cuts in the rate of growth, a perfect example of the kind of budgetary shadow-boxing that has destroyed the trust on the Hill), and all sorts of accomodations could be reached.

    Suggesting that the Tea Party is solely (or even largely) responsible for the deadlock in Washington is the kind of nonsense that some posters here seem to think passes for informed debate. If 2010 taught us anything, it should have taught us that this sort of silliness isn’t going to fly.

    If BOTH houses of congress AND the president aren’t interested in making some sort of workable agreement, I am comfortable with waiting through the elections and letting the new Administration take matters in hand when they take over in January. It won’t be pretty, but at this point it may be the only way.

  • thibaud

    Mead is behind the curve. Even elements of the GOP leadership are now beginning to admit that the Tea Party zealots bear the blame here, calling their behavior “the most irresponsible approach in modern times.”

    The senior Senator from South Carolina added, “We need to have a discussion among ourselves: Where the hell is the Republican Party going?”

    A pity that Mr Mead is not addressing this question instead of perpetuating the phony meme that both sides are to blame.

  • Walter Sobchak

    * * *

    One point to keep in mind is that CBO’s economists are as true-blue Keynesians as exist on the planet. Like the Obama White House and Treasury, they believe in the “multiplier” that $1 of federal spending somehow creates $1.50 in greater GDP. Thus they plug large spending cuts into their economic models, and, presto, they find a recession.

    One remarkable (and highly dubious) note in the CBO report is that the budget gnomes predict a big surge in tax revenues in 2013—to 18.4% from 15.7% of GDP—despite the recession they also predict. CBO simply doesn’t think taxes matter much to taxpayer behavior, so it applies the higher rates to its current predictions of income and pretends revenues will roll in like the tides. But this will be a fantasy if enough Americans find ways to hide their income or work less, or if they simply earn that much less thanks to the recession.

    The larger policy point is that this is the fiscal cliff the Keynesians built.

    * * *

  • Luke Lea

    The recession in Europe and slowdown in China may send us over the cliff anyway.

  • Luke Lea

    Sometimes printing money is the least bad option available. This is one of those times.

  • Art Deco

    The Federal Government is funding around 60% of its operatios with debt.

    40% I think.

  • Corlyss

    This fiscal cliff makes a great rallying point for the politically naive, to get them out to the polls to dispatch the Redistributer in Chief. But as a practical matter, it simply is a non-issue. It will all be resolved in the lame-duck or January. The biggest threat is the continued drag on business planning but only if plans have to be in place by YE 2012 or Jan 2013.

  • Mick The Reactionary

    I’m a little behind the times here.
    Are we still at war with Eurasia?
    Or is it Tea Party we are at war currently?

    What did today’s Two Minutes Hate say?

    Tboud? Cacrucl?

  • Boritz

    Compare the Reagan recovery to the current “recovery” fueled by Keynesian doctrine and try that blametheteaparty thing one more time.

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