Thursday, December 27, 2012

"Fiscal Cliff": There is no Drop Dead Date and more thoughts

by Bill McBride on 12/27/2012 01:50:00 PM

Two months ago I pointed out that there was no drop dead date for the "fiscal cliff" (more a slope than a cliff).

A few things to remember:

There is no drop dead date. Online sites and TV channels with "fiscal cliff" countdown timers are an embarrassment and are just trying to scare viewers.

The "fiscal cliff" is about too much austerity too quickly (cutting the deficit too quickly). The "cliff" is a combination of expiring tax cuts (income taxes, payroll taxes, and more will increase), and forced spending cuts (mostly for defense). This has NOTHING to do with other long term fiscal issues, primarily related to medicare.

• All along I've assumed an agreement would be reached in January. That timing is based on a two assumptions: 1) the tax cuts for high income earners would be allowed to expire, and 2) some politicians will not vote for any package that included a tax rate increase. After January 1st the politicians can vote for a tax cut for most Americans. That is obviously dumb, and makes extra work for many involved with payrolls and taxes, but that is politics.  It is possible an agreement could be reached in the next few days - but I still think January is more likely.  If it slips to February, I'll be concerned.

We need the details of the fiscal agreement before we can estimate the drag on the US economy from all the austerity.

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