4 Potential Fiscal Cliff Scenarios
By Walter Kurtz, Sober Look
Back in May we discussed the impact of several possible “fiscal cliff” scenarios on the US GDP growth (the GDP drag). Those projections were developed by Goldman. We now have a similar analysis performed by Credit Suisse. CS broke down the various possibilities into four likelihood “baskets”:
Basket 1 – The CBO’s “other spending and revenue changes” and the Obamacare tax increases. In our judgment, both highly seem likely to phase in. This would impart the smallest amount of fiscal drag.
Basket 2 – The payroll tax cut, which is losing support and doesn’t appear likely to be extended, but there is still some chance it will. Basket 1+2 is our “most likely” scenario.
Basket 3 – This includes the upper income tax hikes, budget sequester, and expiration of emergency unemployment insurance benefits and the “other expiring provisions” (including the bonus depreciation allowance). These are “on the table” but not part of our baseline.
Basket 4 - The expiration of tax rates below the $200K/$250K threshold, failure to patch the AMT, and failure to enact the “Doc Fix.” In our view, all are highly unlikely.
Then each scenario would represent a combination of these baskets as a cumulative effect.
- Best Case = Basket 1
- Most Likely = Basket 1 + Basket 2
- Plausible Downside = Basket 1 + Basket 2 + Basket 3
- Worst Case = Basket 1 + Basket 2 + Basket 3 + Basket 4
And here is the impact of these scenarios on nominal US GDP.
Source: Credit Suisse
Clearly there is a significant chance that, if not addressed, the “fiscal cliff” will tip the US economy into a recession. This was discussed months ago by numerous economists. But today the Congressional Budget Office made the news by stating the obvious – with timing that certainly feels politically motivated.
Politico: – A trip over the fiscal cliff would likely send the U.S. economy into a recession in 2013, the Congressional Budget Office said on Wednesday, underscoring the impact that congressional gridlock will have if a deal to prevent scheduled tax hikes and spending cuts cannot be struck by the end of the year.
10 Comments
Recessions are part of the economic cycle. They cannot be eliminated but can be mitigated or, much better, the effect of a recession on the weaker part of the population must be mitigated while the richest has to pay a toll because they benefited most during the growth cycle. It appears to me that the wealthy are trying to subvert this and as always it will end badly.
Agree wholeheartedly
It’s laughable.
The notion that if the Bush tax cuts expire then GDP will collapse by 3.8 pct makes you wonder how the economy grew in the 1990s when it had that *huge* tax burden!
The economy has a thousand different factors and they all play against each other. Pulling out one strand and saying that it will end the world is silly at best, politically motivated at worst.
Q: “makes you wonder how the economy grew in the 1990s when it had that *huge* tax burden!”
A: A technological renaissance that produced extraordinary productivity gains, namely.
“A technological renaissance that produced extraordinary productivity gains, namely.”
Debt bubble, actually. That’s what added to aggregate demand.
I’d argue that the credit bubble was more of a 2000s story (late 90s at best) but that’s just me.
Perhaps the favorable demographics of the baby boomers being at peak earning power and consumption played a part. The internet boom was also a big help.
I second the demographics explanation. Boomers were in their high earning, high consumption years. Worker participation was higher.
Globalization and free trade played a part, as did technology advances, as did the peace dividend. Government spending was more productive — more spent on education and infrastructure rather than wealth transfers.
This fiscal cliff discussion seems like a whole lot of nonproductive speculation. It’s a mighty big “IF” that everyone is worried about. So what IF nothing gets enacted by year end? Disaster? Not necessarily. Congress reconvenes in January and can still pass legislation addressing the matter. So worst case, it might go a month or two into 2013, but the entire year with no action? C’mon! Whole lot of needless hand wringing going on here.
Because businesses are understandably making real decisions now based on the possibility no action will be taken. BAE and Lockheed Martin just gave notice that their employees should expect layoffs as a result of the indecision on sequestering. Do you think those employees (many of whom are solidly middle and upper middle class) are going to participate in the economy the same way they did previously? Nope. You’ll hoard cash, take your kids out of college, and not spend another cent more than you need to. You’re smart enough to see how that ripples to everyone.
Those are just early examples. You can expect more of that, and real layoffs, in the near future if the gridlock continues.