Wednesday, December 12, 2012

Uncertainty caused by the fiscal cliff is the real danger to economic recovery

While Pres. Obama and House Speaker John Boehner hammer out a plan that would yank us back from the fiscal cliff, public opinion has settled into two camps. 1) Let us not go over the cliff; the results will be dire if we do; 2) It is good to go over the cliff. The left thinks the GOP would be more likely to deal since they could tell supporters they were cutting taxes the cliff plan raised . The right believes the fiscal cliff will finally shrink government. However, an even greater negative impact on the economy is the specter of uncertainty. The sooner we put uncertainty out of its misery, the better it will be.

There is another reason to move quickly. Cuts in deductions and entitlements will be painful. The longer we drag out the negotiations, lobbyists will have more time to descend on Washington, making any agreement more difficult and lengthy.

If Obama and Boehner cannot come up with comprehensive agreements by Jan. 1, that will pass muster in both houses of Congress, they can at least agree on some short term measures as the first step. However, second steps cannot hang fire long, either. Most economists agree there is time in the month of January to finalize more comprehensive entitlement and tax reform before the impact of the fiscal cliff begins to drag down our economy.

Uncertainty, which the Republicans made into such an issue in the presidential campaign, indeed harms economic growth and evidence is growing that apprehension about the cliff is causing both consumer buying and investments to be put on hold.

Investors have as much as $1.6 trillion sitting on the sidelines waiting to prime our economic pump. What is holding them back is uncertainty. It is as if for the past year, the business community has been holding its breath and waiting for it to be safe to exhale. Both here and abroad, the most frequent tune I have heard from the business community is “just settle the matter so we know how we can plan. Let us know the rules and rates; we can work and plan around or with them.”

However, the GOP has become the champion of uncertainty. It has been dragging its feet on middle class tax cuts in their dedication to protecting the upper 2 percent brackets from a 4.5 percent tax increase on income over $250,000, demanding comprehensive tax reform first (impossible to accomplish before Jan 1), attempting to force the Obama administration to take the blame for cutting specific entitlements , and threatening to undo any agreement reached in in December or January later by opposition to raising the debt ceiling in February. We know what damage the last debt ceiling brouhaha did to US credit ratings. To avoid repetition, the debt ceiling must be included in any deal.

For those who think austerity, like the fiscal cliff's dire cuts in government services and military, are a good thing, just ask Europe how that approach worked for them. Europe's economies keep falling in and out of recession. The US has exceeded 2 percent growth. The Congressional Budget Office predicts going over the cliff would increase unemployment to 9.1 percent and both the International Monetary Fund and the CBO say going over the cliff would kill growth or even plunge us into recession.

For Democrats who think letting us jump off the cliff would be good politics, they are gambling the GOP will capitulate. If they lose the bet, it t will not be only the GOP who gets blamed if no deal is reached. A public in economic pain could lash back at both parties' incumbents in the 2014 election cycle. That prospect is why I think it is likely some sort of a compromise is likely to be reached.

Column published in the Sky Hi Daily News on line edition today 

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