The looming fiscal cliff
By Editorial Board,
THE U.S. ECONOMY grew at a better-than-expected, but still sluggish, rate of 2 percent between July and September. Among the factors that contributed to growth were higher consumer spending and defense spending. Among the factors that retarded growth were a drop in net exports due to slowdowns in Europe and China, and — alarmingly — a 1.3 percent decline in non-housing business investment, the largest such quarterly drop since late 2009.
What’s worse, the slump in investment probably reflects declining private-sector confidence directly traceable to Washington’s inability to get control of the nation’s finances. Specifically, businesses are reluctant to put their capital at risk — and Americans back to work — unless Congress and the White House can banish the specter of massive tax increases and spending cuts set to take effect on Jan. 1.
You haven’t heard too much about this “fiscal cliff” from the two presidential candidates. President Obama alluded to it in a recent interview with the Des Moines Register’s editor and publisher, calling it a “forcing mechanism” for a broader fiscal compromise like the one outlined by the Simpson-Bowles commission. But this mention was the exception that proves the rule: Mr. Obama made these remarks in a conversation that was originally off the record, and it was revealed only after the editor complained about those ground rules.
The cliff consists of a combined $560 billion of tax increases and spending cuts — the latter skewed heavily toward defense. Economists generally believe that this sudden withdrawal of money from the economy would plunge the country back into a recession, though there is disagreement over just how deep that recession might be. The Congressional Budget Office suggests a 4-percentage-point drop in gross domestic product.
Washington needs to come up with a plan — and fast. After all, as both the latest investment numbers and a recent warning by dozens of business leaders suggest, the mere threat of going over the cliff is already hurting the economy and killing jobs.
Nothing will be attempted, much less accomplished, until after we know the election results in November. But it’s not asking too much for Congress to make significant progress in the lame-duck session that will follow, brief though that session may be. Such progress has to combine postponement of the most counterproductive aspects of the cliff with a clear and binding long-term plan, including both revenue increases and cuts in entitlement spending. Only credible action can restore the political and economic confidence upon which our prosperity depends.