The P.A.

A weekly address from Patrick Adams,
President of St. Louis Community Credit Union

Fiscal Cliff Debate Is High Stakes Game Of Chicken

On December 3rd, 2012, posted in: Uncategorized by

My guess is that you heard the words “Fiscal Cliff” at least 100 times over the weekend. One more mention, and I’m about ready to pull a “Thelma & Louise” myself. Seriously, it is a big deal and we probably should understand it. Maybe this will help.

As our country continues our attempts to rebound from the “Great Recession” and a rather anemic recovery that can best be described as slow and stubborn, we are now staring at a precipice that has created great anxiety among us all. What will be the impact? We probably should understand the impact.

How we got to this point of a Fiscal Cliff is for another discussion. Leaving the “how” aside, be advised that two major consequences exist should Congress do nothing with the “Cliff.”

First, a fragile economy (still a long way from being fully recovered) would be dealt a kick in the stomach for sure. Some $600 billion in combined tax increases and massive spending cuts would surely move us back into a recession, pushing unemployment north of levels experienced during 2008 and 2009 – that is to say 9 percent-plus within the year.

Here’s how: Too much too fast (tax increases and spending cuts, i.e. the “Cliff”) will likely result in slowed consumer spending, damaged investor confidence, and an erosion of corporate profits. To make up profits, layoffs occur. Companies are already hanging on to cash and scaling back investment. Not dealing with the Fiscal Cliff with compromise, will exacerbate the lack of business investment. Again, no job growth is the result. No job growth, and there will be limited spending.

In a strange twist of fate, the second consequence would be that Congress’ intransigent behavior would put a huge dent in the 2013 federal deficit. Over years of reduced federal deficit, the national debt would reduce. This is actually good long-term, but the short-term gain may be too punitive as mentioned above. A longer, smoother glide path involving both reasonable tax increases and thoughtful spending cuts over time would certainly be the better way to approach a balanced budget. Think of what you would do at your kitchen table. You would cut expenses and find new revenue (in a controlled manner). The government should adhere to the same idea on a much broader scale.

The timing is horrible to head over “The Cliff.” The U.S. economy is showing signs of moderate growth. The tenets to a turnaround that we regularly watch (unemployment, retail sales, consumer confidence, housing values, car sales and residential building permits) are all pointed in the right direction – not great, but better. Now would be a bad time for Congress to not compromise on a resolution. Sadly, they are much better at acerbic discourse than reaching a happy medium.

Watch carefully as this negotiation unfolds. This game of “chicken” with the American public as the prospective loser is down to the wire. The stakes are high.

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