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‘Taxmaggedon’ could hurt us even before doomsday comes

at 09:00 AM ET, 06/20/2012

Even if we avoid falling off a fiscal cliff, we could still get hurt. How? If Congress becomes politically deadlocked over the expiring tax breaks and impeding budget cuts, that could hold back the economy even before the Jan. 1 deadline. At a Senate hearing this morning, Sen. Orrin Hatch (R-Utah) pointed out that policy uncertainty could affect “hiring, investment and business decisions well before the end of the fiscal cliff.” As such, it isn’t worth “gambling with the economy and waiting ’til early next year.”

Gus Faucher, a senior macroeconomist at PNC Bank, agrees that taxmaggeddon could potentially harm the economy before Jan. 1. During last year’s debt-ceiling debate, for instance, Faucher points out that consumer confidence started plummeting in the months leading up to the Aug. 1 deadline, and August’s jobs numbers were equally abysmal. Congress did strike a deal at the 11th hour, but the debate was at least a contributing factor in the economic slump, Faucher explains. “I don’t want to claim that was all or even mostly due to debate over the debt limit,” he say. “But it was certainly tied to [it].”

Despite its ominous nicknames, “taxmaggedon” should prove to be less of a doomsday clock, by comparison. “It’s not as bad as US government not meeting its obligations,” Faucher acknowledges. But there’s similar political deadlock come December, we could see a replay of last year: consumer confidence could drop once more, and the aftershocks of the fight could “actually start showing up in stock prices as a drag as well,” Faucher explains.

Alice Rivlin, who testified at the hearing, agreed with Hatch that Congress should act sooner than later, or risk real harm to the economy. Sure, the impact of the cliff “doesn’t hit all at once,” the former CBO director explained. But “the image of an America that can’t even avoid this quite cataclysmic, set of self-imposed problems” wouldn’t be a boon to the economy either, she added.

That political dysfunction was, after all, the rationale behind Standard & Poor’s decision to downgrade the U.S. bond rating. Faucher is relatively optimistic that we won’t see the same congressional deadlock at the end of this year, as election-year politics won’t be looming over the lame-duck session. But there’s still the risk it could be deja vu all over again, particularly as we’re poised to hit the next debt ceiling just as the taxmaggedon approaches.

 
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