Last week, Federal Reserve Chairman Ben Bernanke, a man of endless accommodation, drew a hard line under the one thing he could not do to save the US economy. Bernanke told the press:Say no more. Congress and the President haven't done diddly-shit about this and obviously won't until after the election in Novermber, because nothing they do will please everyone, and they all want to get re-elected. They are just kicking the can down the *%#@ road.
"If the 'fiscal cliff' isn't addressed … I don't think our tools are strong enough to offset the effects of a major fiscal shock."The warning was clear: a "fiscal cliff" could cause the Lehman moment of all Lehman moments. It didn't even send a ripple through Washington. Congress went on campaigning and strategizing over election-year politics. They've heard it before. Nothing will be done until after the election. And when something is done, it will be done at the last minute, in the latest custom of these economic disputes...
Here's what to expect: shortly after 1 January, unless Congress intervenes beforehand, we'll see two things happen: $100bn of automatic spending cuts, along with the demise of a batch of tax cuts that have been a crutch for the weak economy – the Bush-era tax cuts that have kept taxes low for eight years; and Obama's 2% payroll-tax holiday....
Each of these separately – tax hikes or spending cuts – would not be enough to dent the US economy by much. But together, the spending cuts and the tax hikes are enormous. The Committee for a Responsible Federal Budget and the Congressional Budget Office both expect that a recession would immediately follow if Congress does not address the fiscal cliff.
The spending cuts, for instance, will add up to $100bn pulled out of the economy by the government, in everything from the defense budget to Medicare. The idea is to reduce the federal deficit by $1tn over 10 years. The tax hikes will return tax rates to what they were before 2003, which means the top tax rate for households could be over 39%, according to press reports.
There are two tricky things about fixing this particular problem. The first is the politics. Everyone in Congress knows this will be a hard-fought battle, and they're happy to put it off.
But here's some additional insight from the article:
The question is whether it's already here. There's reason to believe that Congress's delay in addressing the fiscal cliff has already had a psychological effect on corporate America. A group of economists told the Wall Street Journal that is exactly what is happening: They blame our lackluster recovery this year on a pullback in spending and investment by US companies, which are afraid that the fallout from a fiscal cliff could compromise their ability to find funding or function normally. They've been preparing by essentially rolling into the fetal position in preparation.