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(NOTE: Author has received written authorization from Naked Capitalism Publisher Yves Smith to republish this post in its entirety for the benefit of the Daily Kos community.)

Will the Fiscal Cliff Eat the Recovery, Such as It Is?
Yves Smith
Naked Capitalism
Friday, April 27th, 2012   12:13AM

Lately, the US has been winning the investment beauty contest among Cinderella’s ugly sisters. Europe’s addiction to austerity, rolling rescues, and inability to address internal imbalances means at best a wild ride and at worst a crisis resurgence. China still has its perennial fans, but long-standing bears like Jim Chanos have been joined more recently by Marc Faber, who foresees 3% growth, which is tantamount to a recession. Japan is struggling with a mile high currency. The US, by comparison, does not look too bad.

Or does it? One of the lurking worries in the background is the so-called fiscal cliff. At the end of 2012, a whole passel of tax breaks and special programs expire, from lower payroll tax rates to extended unemployment benefits. This has been lurking in the background for a while (indeed, the US would have faced a contraction in fiscal spending at the end of 2012 had various breaks not been extended).

Ben Bernanke brought the issue to the fore in Congressional testimony today, stating that consumer spending would suffer if Washington continues on an inertial course. Estimates of impact vary considerably. Normura puts the effect at nearly 5% of GDP in the first half of fiscal 2013, which starts October 2012. Deutsche Bank estimates the drag at only 1% of GDP, but the consensus seems to be 3% to 5%.

(Continued below the fold.)

(Continued from above the fold.)

Needless to say, Wall Street does not want its punchbowl taken away (they really don’t care about the impact on ordinary people) and Uncle Ben also said clearly that he can’t compensate for the contractionary impact, so we have a flurry of alarmed reports tonight. (Mind you, I’m not saying this isn’t a big deal, but what it takes to precipitate coverage is amusing).

Some recent commentators are worried that it isn’t possible to get a deal done post election (the trigger date for most of the changes is calendar year end). For instance, FT Alphaville pointed to this column by Stan Collander a few days ago:

Even if there were an agreement on what that should include — and there absolutely isn’t ¬— it would take longer than four to seven weeks just to draft the basic legislation, let alone debate and pass it in committee, debate and pass it in the full House and Senate, come up with a compromise agreement between the two chambers, redraft the compromise and pass the conference report. Add in the need for transition rules, which took a year to draft when the 1986 tax act was adopted, and it’s ludicrous to think that tax reform has any chance of going anywhere during the lame duck.
Keep in mind this is the wrong frame. The issue is whether Congress will decide to renew EXISTING initiatives, not fundamental tax overhaul (in fairness, Collander predicts that stopgap measures are all that will result). Tax maven Lee Shepperd points out that a surprisingly large portion of the tax code is renewed every year, and she is sanguine about the fiscal cliff turning out to be a non-issue.

But as we so far away from business in usual in DC that all bets are off? The Republicans are keen to cut the deficit, or at least like to pretend to be, and if the economy is more or less where it is now or a smidge better, they’ll certainly be champing at the bit to drop the extended unemployment benefits. The Dems would posture that they’d want different breaks eliminated, such as ones like the Bush tax cuts that would hit the well off more. Normally, the expected resolution would be simply to extend the whole shebang, since neither side would give up its half a loaf. But this is a Congress already beset by intransigence, and lame-duck sessions aren’t great for rallying the troops. And on top of that, the budget ceiling will come into play, which will further complicate agreeing on stopgaps.

The lack of focus on the issue in Congress is not a good sign. As Sebastian Mallaby writes in the Financial Times:

….the omens are bleak. Rather than seek a mandate to eliminate tax loopholes and discipline health spending, which are the two central components of any intelligent budget fix, candidates on both sides resort to sound bites
The better way to frame this might be: will all the talk of grand bargains get in the way of some fixes to keep the US from unwittingly going the austerian route? I’d hazard it is too early to tell. While Congress can often squeak legislation through just before deadlines, the ascendancy of the deficit hawks may mean the non-fix is in.
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Comment Preferences

  •  i suspect the GOP's hope that (10+ / 0-)

    making the economy worse will come back to bite them in the ass. at least I'm hoping.

    "Such is the irresistible nature of truth that all it asks, and all it wants, is the liberty of appearing." - Thomas Paine

    by blueoregon on Fri Apr 27, 2012 at 09:13:54 AM PDT

  •  Income Inequality Growth under Obama (23+ / 0-)

    Worse than Bush helps make any broad based recovery impossible.  Unless, like the President you believe in the confidence fairies and trickle down...

    Yesterday, the President gave a speech in which he demanded that Congress raise taxes on millionaires, as a way to somewhat recalibrate the nation’s wealth distribution.  His advisors, like Gene Sperling, are giving speeches talking about the need for manufacturing.  A common question in DC is whether this populist pose will help him win the election.  Perhaps it will.  Perhaps not.  Romney is a weak candidate, cartoonishly wealthy and from what I’ve seen, pretty inept.  But on policy, there’s a more interesting question.

    A better puzzle to wrestle with is why President Obama is able to continue to speak as if his administration has not presided over a significant expansion of income redistribution upward.  The data on inequality shows that his policies are not incrementally better than those of his predecessor, or that we’re making progress too slowly, as liberal Democrats like to argue.  It doesn’t even show that the outcome is the same as Bush’s.  No, look at this table, from Emmanuel Saez (h/t Ian Welsh).  Check out those two red circles I added.

    Yup, under Bush, the 1% captured a disproportionate share of the income gains from the Bush boom of 2002-2007.  They got 65 cents of every dollar created in that boom, up 20 cents from when Clinton was President.  Under Obama, the 1% got 93 cents of every dollar created in that boom.  That’s not only more than under Bush, up 28 cents.  In the transition from Bush to Obama, inequality got worse, faster, than under the transition from Clinton to Bush.  Obama accelerated the growth of inequality.

    The data set is excellent, it’s from the IRS and it’s extremely detailed.  This yawing gap of inequality isn’t an accident, and it’s not just because of Republicans.  It’s a set of policy choices, as Saez makes clear in his paper.

  •  Something (5+ / 0-)

    Like comprehensive tax reform is only possible in agreement. Nothing before elections, then we´ll see. If Obama wins and the situation in Congress is about the same the Republicans may try another round of doing nothing. That could be some serious pain for all of us.

    The problem is that the Republicans have turned so much to the right that any real agreement will certainly mean a civil war for them.

    •  The best possible outcome if the Republicans (9+ / 0-)

      hold either House is that they block any changes.

      Because if they start cutting deals, those will be deals intended to slash the safety net.

      Your vote is your consent.

      by JesseCW on Fri Apr 27, 2012 at 09:55:41 AM PDT

      [ Parent ]

      •  On taxes? (1+ / 0-)
        Recommended by:

        I doubt it. They may try for sure to link it to some programs, but I think they will fight more to preserve some tax cuts. We have to be very clear with the WH that any of that will mean war. I don;t want a fucking grand bargain, but on taxes I think both sides could reach an agreement. Not with Cantor leading for sure, but really any kind of bargain will lead to an internal war in the House.

        If they block everything for four more years we are for a truly bumpy ride

        •  Gridlock kills the Bush tax structure. (4+ / 0-)
          Recommended by:
          pgm 01, Iberian, ColoTim, cslewis

          Grand Bargains will destroy the safety net.

          Gridlock is the best possible outcome if the Republicans wind up in control of either House.

          The White House won't give a fat rats ass what you think once the President is re-elected.  All that leverage you have on this Administration evaporates as soon as he wins.

          The best bet is a serious effort to get the House back, but the only possible way for that to happen at this point is to admit that there has been no recovery for the bottom 99%, and then to map out a convincing plan for creating one which will be implemented if we take control.

          Your vote is your consent.

          by JesseCW on Fri Apr 27, 2012 at 10:58:37 AM PDT

          [ Parent ]

          •  Not agreeing fully (1+ / 0-)
            Recommended by:

            All presidents think about their legacy. A serious popular campaign against something can derail anything, if it is gain strength. Legislation does not flow from the WH but from the Congress. A strong push back  will have effect

            True there is less leverage. I'm all for either controlling the house or gridlock. We will get the house if Obama has some coattails or Romney collapses.

            Anyhow what is really important is to have the outside groups ready to push for specific legislation, chip by chip. The Republican base is much more effective in these being abortion, guns, taxes...

            •  I don't agree with you anymore. (1+ / 0-)
              Recommended by:
              A serious popular campaign against something can derail anything, if it is gain strength.
              Five years ago I would have.

              TARP passed with 68-80% of the Public opposed, Democrats slightly more in favor than Republicans and Indies more opposed than anyone.

              The servers were overloaded at the Capitol.  Literally millions of calls were flooding in, and none of it was Astroturf.  All the big money establishment wanted the bail out.  All the "leaders" in both parties were pushing it.

              And it passed.  

              We won't get the House if Obama wins by convincing just enough "swing voters" to lean his way, and wins by 3-4 points thereby.

              Getting ticket-splitters probably will be enough to keep him in the White House.  That will be enough to constrain some of the worst plans of the Republicans, but it won't be enough to make much if any headway.

              We can't afford another two or four years like the last two.  If this becomes the new normal, there's going to be a reactionary backlash that's going to make the Tea Party Summer seem mundane.

              We'll get the House if Obama once again motivates disenchanted young and occasional voters, who often don't show up, but who did show in 2006 and showed up far bigger in 2008.

              "Happy days are here again" loses both houses.

              "There has been no real wage recovery for 99% of us, because of an obstructionist congress, but we can change that and here's how -"

              has a real chance to win them both.

              Your vote is your consent.

              by JesseCW on Fri Apr 27, 2012 at 11:57:23 AM PDT

              [ Parent ]

              •  This (0+ / 0-)
                We can't afford another two or four years like the last two.

                But I don't WANT to live in "interesting times" dammit!

                by Anthony Page aka SecondComing on Fri Apr 27, 2012 at 01:03:54 PM PDT

                [ Parent ]

              •  There is legislation and there is legislation (0+ / 0-)

                TARP was passed because Congress and the WH were told that it was that or Mad Max. Likely untrue, though the other options were likely to produce also a world of pain. All the calls in the world would not have changed when BUsh was even using executive orders to make TARP funds discretionary to Paulson. TARP was passed in the Senate with super-majority of over 70 votes

                Well see though I rather be a little more optimist

  •  good stuff (4+ / 0-)
    Recommended by:
    bobswern, katiec, Nulwee, TomP

    Thanks for these articles.

  •  Good post, Bob. (2+ / 0-)
    Recommended by:
    bobswern, radical simplicity

    It may happen anyway if Dems are in power, but I know it will happen if Rs are.  Austerity is part of the budget deal the Rs are now breaking.  Might be a way out.  The one good thing is that is reducing defense spending increases.

    I'm from the Elizabeth Warren and Darcy Burner Wing of the Democratic Party!

    by TomP on Fri Apr 27, 2012 at 10:09:16 AM PDT

  •  Prediction: no deal till after election. Then... (2+ / 0-)
    Recommended by:
    FG, yoduuuh do or do not

    ...well, it depends on the election results. My guess is that the GOP will keep the House and take the Senate. The Senate is not a huge loss, as the GOP now filibusters everything in the Senate anyway.

    If I'm right, then we'll see some half-ass limp-along deal that will not change the long-term picture in any fundamental way.

    We may see a temporary such deal by the lame-duck Congress, to tide us over until a longer-term deal can be made by the new Congress. But I don't expect any dramatic changes either way.

    Bottom line: we'll continue to muddle through in bad but not cataclysmic fashion.

    Unless Romney wins. Then we'll have a terrible deal that will send us down the austerity-recession road Europe is now on.

    "The true strength of our nation comes not from the might of our arms or the scale of our wealth, but from the enduring power of our ideals." - Barack Obama

    by HeyMikey on Fri Apr 27, 2012 at 10:15:27 AM PDT

    •  If the Republicans win the Senate and keep the (7+ / 0-)

      House, the filibuster will go away and there won't be anything stopping Congress from restoring the Bush economy, juicing it up on steroids, and Obama can either veto everything and have nothing, not even budgets passed, or can capitulate and let his presidency fall off the cliff and make Bush only the second worst president of all time.

      There won't be gridlock if the Republicans own Congress - there will be catastrophe.

      •  Get ready. (0+ / 0-)

        House: we'd have to have large Democratic gains to take it back. I expect some Democratic gains, but looking around at the overall political environment, I just don't see massive ones. The GOP is fooling too many people too much of the time.

        Senate: of the 35 Senate elections this year, 23 are for seats now held by Dems; 2 are now held by independents who caucus with Dems (Sanders and Lieberman); and only 10 are held by the GOP. Of the 10 open seats, 7 are now held by Dems/Independents, and only 3 by the GOP.

        The GOP only needs a net pickup of 4 seats to take control. I'll be very surprised if they don't get at least 4.

        The Dems would have to gain 7 seats to get enough to break a filibuster. That would be shocking.

        Best we can reasonably hope for: we retain 51 seats  (unlikely) and reform the filibuster rule on opening day by simple majority vote (also unlikely; coulda been done in January 2011 and the Dems wouldn't do it). But even if both these unlikely things happen, that still leaves the House in GOP hands, which means stalemate. The Bush tax cuts might expire, which would be good very long-term, but there still will be no short-term stimulus.

        Unless Obama takes my advice and uses the EPA to crack down on greenhouse gases. Fat chance.

        "The true strength of our nation comes not from the might of our arms or the scale of our wealth, but from the enduring power of our ideals." - Barack Obama

        by HeyMikey on Fri Apr 27, 2012 at 12:10:28 PM PDT

        [ Parent ]

        •  Math & history. (1+ / 0-)
          Recommended by:

          Remember, the Senate crop of this year was elected in 2006, which was a massive Democratic wave year. To replicate those results, we'd need another massive Democratic wave. Do you see that coming? Me neither.

          "The true strength of our nation comes not from the might of our arms or the scale of our wealth, but from the enduring power of our ideals." - Barack Obama

          by HeyMikey on Fri Apr 27, 2012 at 12:15:22 PM PDT

          [ Parent ]

          •  I have hopes for the Senate, even with the (1+ / 0-)
            Recommended by:

            imbalance of the seats being defended.  I haven't gone through the list of just who is up for re-election, and I know people like Webb in Virginia is out, and states like Nebraska will be lost in all likelihood, but then I look at Indiana and Connecticut and have hope again.

            I am also hopeful that the House swings back as the Tea Party seems to have really elected a bunch of people who have shown they don't deserve their seats.

            •  Here's hoping! (0+ / 0-)

              I'm in Georgia. I don't see much hope for picking up any seats here.

              Our brightest light seems to be Elizabeth Warren. I'm ready now to contribute to her 2016 Presidential campaign.

              "The true strength of our nation comes not from the might of our arms or the scale of our wealth, but from the enduring power of our ideals." - Barack Obama

              by HeyMikey on Fri Apr 27, 2012 at 09:18:27 PM PDT

              [ Parent ]

  •  A reminder that our Wars and our Deficits, (10+ / 0-)

    are about the same amount of money. It is impossible to talk about the US economic decline without thinking at the same moment of our War of National Suicide being conducted worldwide against any nation which could conceivably be considered a threat at any time in the future.

    Our foreign policy is sheer lunacy, and is providing the population with the exact opposite of "security," whether on an individual basis, or the nation as a whole.

    Want to fix the budget problems, get the nation on a growth pattern? End the various Wars On, put the money into building needed things (of which there are many) at home.

    Can't separate the wars from economic crises, just can't.

    The Internet is just the tail of the Corporate Media dog.

    by Jim P on Fri Apr 27, 2012 at 10:16:16 AM PDT

    •  Wars and maintenance (1+ / 0-)
      Recommended by:

      They gin up wars to keep the complex going.  They need the infusions of money for the contractors.  It allows R&D and construction of the current models.  That is why they will do anything to control the government process.  The US is a war machine and has been since WWII.

  •  Recovery? (4+ / 0-)
    Recommended by:
    notdarkyet, Mr Robert, gatorcog, bobswern

    In Q1 the government borrowed and then pumped into the economy $359 billion. For its efforts the GDP grew by all of $142 billion.

    In other words even with the fiscal pipes on full open there is no recovery (its all an illusion). Close them down and watch out.

    Nothing has been done to fix what caused the recession.
    The stock markets and bond markets are broken.
    Interest rates, the key signal for markets to operate effectively are being kept artificially low.
    The powers that be keep hoping that consumers will go out and borrow and somehow save the economy.

    It ain't gonna happen.

    Those who make peaceful revolution impossible will make violent revolution inevitable. - JFK

    by taonow on Fri Apr 27, 2012 at 11:21:39 AM PDT

  •  They will just renew all or most cuts just like (0+ / 0-)

    they did in 2010. Yeah, tax reform is unlikely but even the renewal of existing legislation is enough to avoid any crashes.

  •  Welcome to the 1% Recovery! (2+ / 0-)
    Recommended by:
    bobswern, aliasalias

    Welcome to the 1% Recovery!

    As the 1% reap 93 percent of the income gains from the recovery, we're rapidly returning to pre-New Deal levels of inequality.

    There was a brief debate focused on the following question: would the gains of the economy continue to accrue to the top 1% once the recovery started, or would they have a weak post-recession showing in terms of raw income growth as well as income share of the economy? The top 1% had a rough Great Recession. They absorbed 50 percent of the income losses, and their share of income dropped from 23.5 percent to 18.1 percent. Was this a new state of affairs, or would the 1% bounce back in 2010?

    We finally have the estimated data for 2010 by income percentile, and it turns out that the top 1% had a fantastic year. The data is in the World Top Income Database, as well as Emmanuel Saez’s updated "Striking it Richer: The Evolution of Top Incomes in the United States" (as well as the excel spreadsheet on his webpage). Timothy Noah has a first set of responses here. The takeaway quote from Saez is, "the top 1% captured 93% of the income gains in the first year of recovery.”

  •  I believe this will end very badly (1+ / 0-)
    Recommended by:

    Nothing will be settled before the election, this country is far too divided both in Washington and in the states for any consensus to be reached. Beyond that, each element of the cliff will be politicized and distorted so that the divide will grow deeper.  We know that republicans will do all within their power to make sure that the middle class and the poor bear the burden of increased taxes and decreased assistance; nothing will change this.  We know the Democrats will make a lot of noise but really won't have a plan, certainly not one they'll stick with.
    After the election, we will see either chaos (Obama re-elected and Dems controlling 1 house of Congress with a bunch of riled up lame duck tea-partiers running amok) or Armageddon (Republicans control Congress and the Presidency).  Unfortunately, America is too dysfunctional to agree on reasonable solutions, particularly in economic matters.

  •  No more 'grand bargains' to extend the very (2+ / 0-)
    Recommended by:
    aliasalias, TheMomCat

    tax cuts for the wealthy that helped destroy the economy in the first place.  Let Bush tax cuts expire, and doing so chops the deficit drastically.

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