Peering over the fiscal cliff
by Liz Hester
There’s obviously a lot going on in terms of the economy and with the looming presidential election bringing up many issues, it seemed like a good time to take a look at recent coverage of the fiscal cliff.
First off, Bloomberg’s Aki Ito and Joe Carroll offer this good primer while covering comments from Federal Reserve Bank of Chicago President Charles Evans, a strong proponent of more monetary stimulus to ease unemployment:
Slowing growth abroad, Europe’s debt crisis and the so- called fiscal cliff — in which $600 billion of tax increases and spending cuts take effect at the beginning of next year unless Congress acts — have increased risks to the economic outlook, Evans said.
“Piling these risk events on a weak economy could throw us back into recession,” he said. “Underestimating the enormity of our problems and the negative forces holding back growth itself exposed the economy to other potentially more serious unintended consequences.”
David Wessel also has a timely piece in the Wall Street Journal with even more details about what’s slated to happen if no action is taken:
The story so far: In August 2011, Congress and President Barack Obama agreed to cut $900 billion over 10 years from annually appropriated federal spending, the roughly one-third of the budget that goes for everything from buying bullets to paying park rangers.
To force themselves to do more, Congress passed and Mr. Obama signed a law that requires painful, across-the-board spending cuts (known as a “sequester”) beginning Dec. 31—unless there is agreement on a combination of benefit cuts and tax increases that saves another $1.2 trillion over 10 years. The tax cuts initiated by President George W. Bush and extended by Mr. Obama are set to expire the same day.
With three months to go, Congress has left town until after the Nov. 6 elections with no apparent progress toward a compromise.
But according to Politico’s Ben White in his Morning Money email, many on Wall Street consider this to be the first and most important thing Congress will need to do after the election. From White:
COMING POST-ELECTION: CEOs TO PUSH ON FISCAL CLIFF - In multiple conversations recently, top corporate executives have indicated to M.M. that following the election (and no matter the outcome) they will push hard for a broad tax and spending deal in Washington that will take the threat of the fiscal cliff off the table even if it means significant new revenues. The executives have said their efforts could help offer cover to Republicans afraid of signing onto any deal that might anger hard-core tea party leaders or anti-tax advocates such as Grover Norquist. “We don’t really care if our taxes go up a little if we can just get this done and take this threat away from the economy,” one top executive at a Fortune 100 company told MM this week.
These executives say either an Obama II or Romney administration could enlist them to sell a deal both inside and outside the Beltway. They all suggest the final package will look something like Simpson-Bowles. And many believe that coupled with a recovering housing market, a domestic energy boom and a lessening threat from Europe, a functional Washington could finally open the door to a significant economic expansion that would cut the jobless rate and slice into short term deficits and long-term debt.
Wessel writes that if Romney wins, any talks are likely to be pushed to mid-2013 as he forms a budget. If Obama is back in the White House, his ability to get something accomplished will depend on the make-up of Congress and his margin of victory.
Either way, the government has already put temporary funding in place until March 31, 2013 and funded some entitlement programs. That makes solving the problem this year less imperative, but still important, Wessel writes. He also makes an important point: all the conjecture about Washington’s time frame depends on Wall Street and the financial markets remaining relatively stable during the talks and debates.
Given the market swings during the debt ceiling debate, it’s unlikely that investors will sit idly by without clear signals from Washington. And as White wrote, some of the nation’s biggest executives are planning to get involved to force a quicker resolution.
The past eight years have taken a real toll on investors, confidence, as well as personal wealth. It’s hard to believe that a year after the debt ceiling debate and near catastrophe that we’re back waiting on Congress to make a decision and that they’re even considering pushing it off.
This week, I wrote about more positive housing and consumer spending numbers. I spoke with a friend who said, “I just want to believe it’s getting better.” That seems to be the sentiment for many people, but with the perfect storm of tax increases and spending cuts looming, the government is going to have to take some action to make sure that good news doesn’t turn bad.