Inaction on Fiscal Cliff Threatens Immediate Economic Harm

Blog Post
Friday, August 10, 2012

Congressional procrastination could lead to chaotic decision-making on the federal budget after the November elections, but many economists believe this procrastination is already harming the economy.

The damage stems from widespread uncertainty over what elected officials will do, if anything, about the “fiscal cliff” – a combination of sharp “automatic” spending cuts and the scheduled expiration of tax cuts at year’s end.

The Wall Street Journal reported today on its survey of 47 economists, noting their widespread concern about the growing economic cost of congressional inaction. This “adds insult to injury to an economy already flirting with a stall rate,” said Diane Swonk of Mesirow Financial. Another analyst, Julia Coronado of BNP Paribas, said: “We are already feeling the effects in hiring and investment.”

The general expectation in Washington is that elected officials will not take action on the fiscal cliff until after the elections, despite encouragement throughout much of this year from The Concord Coalition and many other analysts and groups to work out a bipartisan action plan as soon as possible.

Ideally, this would have been done months ago in the context of comprehensive fiscal reforms to finally put the federal budget on a responsible and sustainable long-term path.

Instead, Washington continues to force individuals and businesses to rely on political rumors and guesswork about future tax rates and other aspects of the fiscal cliff. Most of the economists in the Journal’s survey said that until Congress can reach a deal this year, worries about the fiscal cliff and preparations for dealing with it will continue to drag down economic growth.

If there is no deal at all, the economists on average thought it would subtract 2.2 percentage points from the economy’s growth next year. That would be a hammer blow that would knock out most of the 2.4 percent growth they would otherwise expect.

Others, too, have warned Congress that its failure to act on the approaching fiscal cliff is already causing damage. In June, for example, Congressional Budget Office Director Doug Elmendorf said uncertainty about what the government would do was already “weighing on the economy” and probably reducing spending by individuals and businesses.

Elected officials are now out on the campaign trail, fervently assuring the public that their top concern is the weak economy. Unfortunately, that rhetoric is taking priority over concrete action to support the economic recovery.