The United States will retreat from its 'fiscal cliff'

Lawmakers will prevent the worst, with a Band-Aid fix.


(Photo: iStock)

Blame political culture. Blame the Tea Party. Blame an addiction to government-by-doomsday-scenario, if you must. But whatever you blame, one fact remains: barring a congressional deal between now and year-end, the United States will undergo a massive, deliberate fiscal contraction beginning Jan. 1, 2013. Government cutbacks mandated by the August agreement to extend the debt ceiling, combined with the expiration of Bush-era tax cuts, are scheduled to take roughly $500 billion out of the U.S. economy in January. That’s nearly 5% of American GDP, according to Goldman Sachs—an economic haircut the firm’s analysts called last month “a historically unprecedented one-year reversal in fiscal support for the economy.”

This “fiscal cliff,” as Ben Bernanke has dubbed it, would almost certainly push the U.S. back into recession. The non-partisan Congressional Budget Office predicts the combined impact of spending cuts and tax hikes will lead to a contraction in real GDP of 0.5% between the fourth quarter of 2012 and the same period in 2013.

United States lawmakers will probably prevent the worst from happening—as they did in the debt-ceiling crisis—but nothing is likely to occur before November. And in the lame-duck Congressional session that will follow the election, the best anyone can hope for is a short-term deal that punts the issue into the new year.

But short-term fixes won’t cure what’s ailing the U.S. CEOs need a sense of where fiscal policy is going, and not just this quarter. The mere threat of the fiscal cliff has already worsened business conditions in the U.S., according to a July survey by Morgan Stanley. Uncertainty related to the deadline has already slowed corporate spending and curbed companies’ hiring plans.

But to get coherent policy, you’d need political agreement, or at least one-party dominance, and the United States isn’t likely to see either of those any time soon. For 2013, that means more fiscal cliffs or more short-term deals. For the rest of 2012, it means an economic recovery far more sluggish than it has any need to be.