The Fiscal Cliff – An Approaching Disaster

With a fiscal hawk added to the Republican Presidential ticket, the talk these days is centered on the fiscal cliff.

The cliff is a figurative expression designed to convey the pain that is likely to occur if stimulus policies put in place by Congress, and the President expire at one time.

These policies were intended to combat the slow-growing economy. Ironically, most will terminate automatically and simultaneously around the end of 2012.

The sudden negative impact on economic growth would be akin to falling off a cliff.

The Congressional Budget Office (CBO) projects that GDP growth will average 2.2% in 2012. However, if the fiscal cliff occurs, growth in 2013 will decrease to 1.1%.

Expect to see this precipitous drop in GDP growth unless a budget compromise is put into place by Congress and the President to avert it. However, that is not likely!

Come February, a number of important stimulus measures will expire unless they are extended by Congress, but Congress is now in recess. Furthermore, when legislators return there will only be 13 more working days before the election. All of this suggests that the odds of a compromise are not good. Worse still, budget compromise has suddenly morphed into a polarizing political agenda.

The negative drag on the economy will come from the expiration of a number of measures, including the following:

• The Bush era tax cuts; they expire at the end of 2012.
• The payroll tax cut; it expires at the end of February 2013.
• Emergency unemployment benefits will expire around the end of the year.
• Across-the-board spending cuts will be made to non-security programs such as Medicare and in security programs such as Department of Defense, Homeland Security, and Veterans Affairs.

Automatic across-the-board cuts will occur unless a compromise is reached on a budget reduction plan. This mandate is based on the Budget Control Act of 2011, which was enacted to be immune to filibuster.

The CBO projects that the economy will pick up in the year 2014. However, the fiscal cliff will cause growth to slow down so severely it is hard to put much faith in that projection. In fact, it is more likely that the fiscal cliff will have the economy flirting with recession in 2014 rather than experiencing renewed growth.

While CBO is optimistic about growth reoccurring in 2014, it is more sober about the timeframe within which we can expect full employment to return to the economy – not until 2022 does the CBO expect the unemployment rate to be 5.3%.

It is time for Congress to put aside politics, act in the best interest of the economy and avert this looming catastrophe.