I’ve posted numerous warnings about the big fiscal cliff baked into the legislative cake (whoa…mixed metaphor alert!). The full sunset of the Bush cuts, the automatic spending cuts, and a bunch of other expirations would amount to a fiscal drag well north of 3% of GDP.
Here, from the able analysts at Moody’s Analytics, is a table of the components of the cliff and their values in 2013. The first column shows the current law baseline—everything goes crash—and the second column shows Moody’s guesstimates of what Congress might do to soften the blow.
That cuts the blow by about half, which still ain’t nothin’—and pushes in the wrong direction given an economy that will still be facing highly elevated unemployment.
That said, the conventional wisdom is that the Congress and the administration kick the can down the road by extending everything for another six-12 months. But I think the President—who will still be president no matter the outcome of the election as this decision must be made in the lame duck session at the end of this year—is much less likely to blink this time and the high-end Bush cuts will sunset, as in the Moody’s forecast.
And that is at it should be; $80 billion is real money, for sure, but a tax bump on high-income households is less worrisome from a macroeconomic perspective, as they’re not the folks who are liquidity constrained. And let’s face it—if these high-end cuts are extended yet again, they’re probably permanent.