In earlier blog posts, I have alerted readers to what Alan Greenspan refers to as the “fiscal cliff” that our Congress has created. The laws that are currently on the books will raise taxes and cut government spending beginning Jan. 1, 2013. Economists have estimated these laws will reduce economic growth by 3.5 to 5 percent.
Our economy is currently growing at around 1.5 percent. If this witch’s brew of legislation is not reversed, we will be in a recession early in 2013.
Then there is the issue of the “debt ceiling.” Apparently, we are going to hit the authorized debt limit again sometime after the first of the year. So we could be subjected to the same drama that we saw last August, when the press trumpeted how the government would run out of money and Social Security checks wouldn’t be sent . . . and on and on.
I can’t imagine that any member of the House or the Senate is going to allow this to actually happen.
The number of Americans who are becoming aware of the magnitude of this fiscal cliff is growing by the day. Eight weeks ago, almost none of my audiences had even heard the phrase. In the past two weeks, 50 to 80 percent of my audiences have heard about it.
My premise has been that as more and more people become aware of this drama ahead, they will start postponing decisions like buying cars and houses, hiring workers and investing in business equipment. Initially I thought this slowdown wouldn’t happen until Labor Day. But I think I was wrong. It appears that economic activity is slowing across the board. I personally don’t think this indicates that our economy is weakening. I think it indicates that people are going to wait until the drama is over before they resume spending and investing.
My guess is that Congress will ultimately “kick the can down the road” again, by extending all of the fiscal cliff issues until July 2013. They really don’t want to address this issue at all. They seem to be satisfied to continue to run trillion-dollar deficits and never ask the American people to share in some sacrifice to begin to balance the budget.
If they were to make this announcement in August and tell the American people they are going to extend all of these issues until next July, I think that would be helpful in the short run. I think economic activity would start to pick up again. But I doubt this will happen. My fear is that both parties in Congress will prefer to continue the drama and uncertainty and blame the other party for the consequences.
So my guess is that shortly after the election and before Thanksgiving, Congress will vote to extend all current laws and postpone any fiscal decisions until sometime next year. By this time, there will be no political capital to be made from scaring the public with fiscal drama. There would be no reason to continue. This would encourage people to spend more for Christmas, which is important for many American employers.
Of course, no real healing will occur in our economy until Congress shows the courage to begin to balance our budget over a ten-year period. Adopting Simpson-Bowles is the best long-run solution on the table at this point. Until we do that, we will just limp along, kicking the same can.
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