What is in this article?:
- Fiscal cliff not as steep as stated
- Sluggish growth is typical
• Fiscal cliff is neither as precipitous nor as close as some would have us believe.
• The biggest hit occurs in the second quarter.
• Failure to act likely will result in another recession and increased unemployment.
The headache some folks wake up with on Jan. 1, 2013, most likely will be the result of New Year’s Eve over-indulgence rather than a precipitous fall over the mythical fiscal cliff.
“How the fiscal cliff is resolved has a bearing on both near-term growth and long-term debt,” says Chad Wilkerson, Oklahoma City Branch executive and economist for the Federal Reserve Bank of Kansas City.
But that so-called cliff is neither as precipitous nor as close as some would have us believe, Wilkerson said during the third annual Rural Economic Outlook Conference held on the Oklahoma State University campus in Stillwater.
He said recent descriptions of the mandatory tax increases and spending cuts scheduled to go into effect in 2013—f ailing congressional action before year’s end—as more slope than cliff makes sense. Not all of the mandated cuts will occur on Jan. 1.
“The process will roll out throughout 2013,” Wilkerson said, “with the biggest hit occurring in the second quarter.”
Uncertainty about how Congress will address those mandatory cuts “are weighing heavily on the economy,” however, and Wilkerson says negotiations have begun to seek a solution to the stalemate. Failure to act likely will result in another recession and increased unemployment.
“Economic forecasters generally assume the fiscal cliff will be avoided without recession,” he said. But he also noted that if all the tax increases and spending cuts scheduled occur, GDP could drop by 4.5 percent.
The Congressional Budget Office projects that unemployment would rise 1 percent “if we go over the fiscal cliff,” Wilkerson said.
Over the long-term, however, allowing the fiscal cliff to play out, accepting both the tax increases and the spending cuts, would reduce the budget deficit over the next 10 years.
“Avoiding fiscal changes,” Wilkerson said, “means further increases in the national debt.”
Some areas, such as unemployment, likely will get better, Wilkerson said. “At its September meeting the Federal Open Market Committee, the branch of the Federal Reserve Board that determines the direction of monetary policy, indicated that unemployment will improve “gradually.” The range of views of FOMC members about monetary policy includes relatively wide variations.
He said some improvement in the U.S. economy has already begun but at a slow pace. “The U.S. economic growth has been moderate,” he said, “as European and political concerns remain high. U.S. gross domestic product (GDP) rebounded somewhat in quarter three but business investment and exports weakened.”