Congressional Cliff Theatrics: What’s At Stake

December 20th, 2012 at 8:21 pm

At a time when we very much need our policy makers to be forging compromise, House Republicans are screwing around with their plan B.  I’ve gone through the economics and politics of this folly, but I keep coming back to my role as Cassandra-on-the-economy (an increasing lonely role here in DC).

A few days ago, I plotted the plight of the unemployment rate.  Even with a decent compromise resolution we’re looking at high jobless rates for the next few years.

But today, when the revised GDP growth rate for the third quarter of this year come out at 3.1% real, I went back and looked at what the CBO predicted re the path of real GDP if we go over, and stay over, the fiscal cliff (remember, a fiscal bungee jump would not invoke anything like the recessionary impact of staying over).

The figure below shows annualized real quarterly growth rates for GDP with actual data through 2012Q3 and the CBO forecasts after that.  As you can see, if we go over and stay over, the swing in real growth is sharp and quick.  We go from growing about 2.5% in the second half of this year from contracting at a highly recessionary rate of about 3% in the first half of next year.

So while House R’s are having a gay old time with meaningless votes with just days to go before cliff impact, that’s what’s at stake on the growth side of the equation.  It ain’t over til it’s over, and the week started with a spirit of compromise, with both sides giving some ground.  We could, in the interest in functional government and protecting the recovery, get back there.  But that’s feeling increasingly like a long shot.


Sources: BEA, CBO

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2 comments in reply to "Congressional Cliff Theatrics: What’s At Stake"

  1. James says:

    Someone has to have said this already.

    Why would the R’s want to compromise? We can go over, someone will push through a new middle class tax cut so that they can save their jobs for 2014. The R’s will save face by being able to claim that they didn’t vote for a tax hike and be able to say that they lowered rates on the middle class. They can even claim to have tried to stop the top tax rates from going up by not compromising.

  2. jim says:

    Congressional Cliff is absolutely right! The Cliff set up by Congress to get itself to do its job. It can, as you say, “bungee jump” over the Cliff or reset its own deadline if they wish.