-- You do not have to be an investor in the stock market or real estate or looking for a job to be alarmed when several highly regarded observers warn that the United States economy is about to be driven "off the cliff" by increasing debt, the expiration of tax cuts and the prospect of deep spending cuts.
The alarm should concern anyone who cares about our democratic system.
The reason we are getting awfully close to the edge is because the Democrats and Republicans are inclined to pull the steering wheel in opposite directions. Granted, alarms are often sounded, but as we shall see shortly, this time there are strong reasons to fear that our gridlocked political system will prevent us from responding before we go over the edge.
king out this time is that of Ben Bernanke, the chairman of the Federal Reserve. He stated recently that, "It is very important to say that if no action were to be taken by the fiscal authorities, the size of the fiscal cliff is such that there is, I think, absolutely no chance that the Federal Reserve could or would have any ability whatsoever to offset that effect on the economy."
Mohamed El-Erian, the highly regarded CEO of the investment management firm Pimco, wrote recently in an article in The Washington Post headline "The Fiscal Cliff Cometh"
that, "In the next few months, possibly within weeks, markets here and abroad will be looking for signals that our politicians understand the severity of the situation and are able and willing to act appropriately. If clear signals are not forthcoming, markets could react early to the looming trouble, compounding the uncertainties that weigh on the U.S. economy."
The Economist changed the metaphor but not the point.
Under the title "cliff diving," it predicts that Congress is unlikely to pass a "grand bargain" before the end of the year and that "[c]redit-rating agencies may well lose patience" before lawmakers get their act together. This in turn would lead to higher interest rates that might well push the fragile economy into another recession.
The main reason Bernanke and other financial and political observers are worried is that by the end of the year, we will face what might be called a triple witching hour. At that time, the Bush tax cuts will expire and the payroll tax holiday will end. Additionally, Congress has committed itself to cutting spending by about $100 billion next year and more than $1 trillion over the next decade.
If the Bush tax cuts and payroll tax holiday are extended, and Congress wriggles its way out of its commitment to cut spending, the deficit will swell to the point where alarmists see us going the way of Greece.
If the Bush tax cuts and payroll holiday are not extended, and Congress lives up to its commitment to cut spending, the drag on the economy will be severe. The economy is expected to decline by 3.5% to 5% ; that is, it will be pushed back into a serious recession. No wonder some predict