Ezrati’s Economic Outlook: The Fiscal Cliff

Congress isn't Thelma and Louise. Legislators are likely to take action to stop or postpone looming tax hikes and spending cuts after the election.

The Congressional Budget Office (CBO) released a sobering report last month entitled Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013. It reminds all that in the absence of some action, the nation faces automatic spending cuts and tax increase in January—a “fiscal cliff,” to use the phrase popularized by Federal Reserve Chairman Ben Bernanke—that would likely turn the already weak economic recovery to recession. It is hard to argue with the CBO’s conclusions on the economic effects, but it is still reasonable to ask if even this Congress, even in a lame duck session after the election, would allow such a thing to happen. Probabilities suggest the answer to that question is “no,” that Congress will avoid economic suicide, allowing the economy’s admittedly plodding recovery to continue.

The CBO report identifies eight elements of this looming fiscal drag: five automatic tax hikes and three automatic spending cuts. It estimates their total impact for fiscal 2013 at $607 billion or some 4% of GDP, enough to turn positive growth negative.

About the Author

Milton Ezrati

Milton Ezrati

Milton Ezrati is senior economist and market strategist for Lord Abbett & Co. and an affiliate of the Center for the Study of Human Capital and Economic Growth at the State University of New York at Buffalo. His latest book, Thirty Tomorrows, linking aging demographics and globalization, will appear next summer from Thomas Dunne Books of St. Martin’s Press. See more of his articles about the economy here.

 

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