Fiscal Cliff Uncertainty Already Causing Economic Harm

Posted: Dec 27, 2012 9:37 AM
While President Obama flies back to Washington in order to try to force Republicans to pass his fiscal cliff plan once again, forces are already at work causing real harm to the economy. And despite all this, there are some who think that going over the cliff is still worthwhile.

Ben Bernanke said that policy uncertainty, both about the fiscal cliff and the debt ceiling, are already affecting private spending and investment.

Speaker John Boehner's "Plan B," which would have raised tax rates on some high-income Americans, was never brought up for a vote for the fear that Boehner did not have enough votes to pass it. President Obama and Harry Reid had already refused to work with Boehner anyway, but it was an example of how difficult it will be for Republicans to hold their noses and vote for tax rate hikes.

The Associated Press' reporting is still promoting the idea that it's okay to go over the cliff and feel very little economic effect:

If New Year's Day arrives without a deal, the nation shouldn't plunge onto the shoals of recession immediately. There still might be time to engineer a soft landing.

So long as lawmakers and the president appear to be working toward agreement, the tax hikes and spending cuts could mostly be held at bay for a few weeks. Then they could be repealed retroactively once a deal was reached.

The big wild card is the stock market and the nation's financial confidence: Would traders start to panic if Washington appeared unable to reach accord? Would worried consumers and businesses sharply reduce their spending? In what could be a preview, stock prices around the world dropped Friday after House Republican leaders' plan for addressing the fiscal cliff collapsed.

We already know what that "big wild card" would do. As few as three weeks over the cliff, according to former Federal Reserve Vice Chairman Alan Blinder, would cause a recession. Stock markets and investor confidence would shatter after a mere three days over the cliff:

"Markets are putting a very low weight on the notion that we actually go over the cliff for more than three days," Mr. Blinder said. A delay beyond that "would really kick the chair out from under the markets' current belief" and trigger a wider reaction among investors and then consumers.

President Obama and Harry Reid's fiscal cliff plan, so far, has been nonexistent. Obama has proposed ideas but refused to coordinate with Harry Reid and write them down into legislation. He's claimed that merely taking up a Senate bill that passed in June would suffice, when that legislation does nothing about spending cuts or even supposed Democratic priorities like unemployment insurance. It doesn't touch the necessary patch for the Alternative Minimum Tax, which is perhaps the most important tax policy involved in the fiscal cliff.

Going over the fiscal cliff even for a small amount of time will likely cause a recession. There's certainly a significant faction of conservatives who think this is worth it because Democrats have proven so uncompromising on conservative priorities. But make no mistake: a recession would be highly likely, and would impact all Americans during a time of economic hardship and recovery from the 2008 market crash. Speaker Boehner thinks higher tax rates on the rich are worth avoiding that. It's still an open question as to whether President Obama is comfortable not getting everything he wants to avoid it.

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