A Fiscal Cliff? More Like a Fiscal Slide…

Here’s a very good summary of the impact of the “fiscal cliff”.  Not that this isn’t a big deal, but it’s not a cliff so much as it’s a “slide”.  Either way, the lack of an agreement would have a big drag on 2013 growth even if it’s gradual.  More via the CPBB (thanks to Joe Weisenthal):

“The federal budget is expected to shrink dramatically between 2012 and 2013 if the laws governing revenues and spending remain largely unchanged.  With no action from policymakers, that sharp reduction in the deficit would slow the economy dramatically, likely creating a mild recession in 2013.

Even under that scenario, however, the economy will not go over a cliff and immediately plunge into another Great Recession in the first week of January.  Rather, most households will begin to receive somewhat smaller paychecks due to higher income tax rates and the expiration of the payroll tax cut, but the impact on their cash flow would play out over the year rather than being concentrated in January.  More important, there is bipartisan support for extending most of the middle-income tax cuts through 2013, so the impact of a temporary expiration of the tax cuts on consumer spending is likely to be modest, given the very high likelihood that lawmakers will end up extending them retroactively to January 1, 2013 if they haven’t acted by New Year’s Day.

The greater danger is that misguided fears about the economy going over a “fiscal cliff” into another Great Recession will lead policymakers to believe they have to take some action, no matter how ill-conceived and damaging to long-term deficit reduction, before the end of the year, rather than craft a balanced plan that supports the economic recovery in the short term and promotes fiscal stabilization in the intermediate and longer run.”

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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