Like most Americans, you're probably thoroughly enjoying the nasty 2012 presidential election. We just can't get enough of the rape gaffes and the birth-certificate jokes, am I right?
But did you know that what you might consider frivolous electo-tainment could actually cause the entire U.S. economy to crash?
That is the warning in a new note by Bank of America economist Ethan Harris. He cautions that the ugly back-and-forth of this campaign could hurt the chances of Congress getting anything done about the "fiscal cliff," the $600 billion to $700 billion in tax increases and spending cuts set to take effect at the end of the year.
The Congressional Budget Office warned earlier this week that the cliff could cause a fairly deep recession in 2013, and Harris wrote in his note Friday that the election could make that nightmare scenario a reality:
Unfortunately, in our view, the “energize the base” campaign from both sides increases the risk of a poor outcome for the fiscal cliff. Recall that avoiding the cliff -- that is, $500 bn in tax increases and $200 bn in spending cuts -- requires that both parties do a 180-degree turn. They must quickly forget the campaign, turn their guns into plowshares and negotiate a compromise with the “enemy.”
Harris worries about two possible scenarios unfolding if the parties can't come to an agreement. In the first, both Democrats and Republicans use the cliff as leverage to get what they want, ending in a Tarantino-style standoff that leaves everybody dead: The Democrats let tax cuts expire so they can revoke the Bush tax cuts for the upper class. The Republicans let the spending cuts tax take effect so they can cut spending for everything except defense.
"The question then becomes how long does it take for one side to 'blink' and how much damage does it do to the economy and markets," Harris writes.
In the second scenario, if a new president and Congress are elected in November, then the new government might just let the tax increases and spending cuts happen and avoid cutting a deal with the old government, thinking it will get what it wants anyway after the inauguration in January. The trouble with this approach is that the new minority government in January could still make problems for the new majority, with filibusters and such. Again, the economy will burn while Congress fiddles.
Mitt Romney's selection of Rep. Paul Ryan (R-Wis.) also presents a problem for solving the fiscal cliff, Harris writes:
As a leading House conservative, Ryan has been pushing for immediate, front-loaded, action to reduce the deficit. Since arguably winning the debt ceiling battle last summer, House conservatives have been presenting budgets that include even bigger cuts than agreed to under the debt ceiling agreement and they have warned that they will use the next debt ceiling -- which likely hits in December -- as a negotiating lever. In our view, this group will block attempts to delay spending cuts for more than a couple months.
Below are 7 presidential speeches on the economy that failed:
1. Truman's Railroad Strike Message
<strong>Date:</strong> May 25, 1946<br> <strong>President:</strong> Harry S. Truman<br> <strong>Inflation:</strong> 8.3 percent<br> <strong>GDP 1 yr. growth:</strong> -10.9 percent (the second worst since The Great Depression)<br> <strong>Unemployment:</strong> 3.9 percent<br><br> On May 25, 1946, Truman said: "I come before the American people tonight at a time of great crisis. The crisis of Pearl Harbor was the result of action by a foreign enemy. The crisis tonight is caused by a group of men within our own country who place their private interests above the welfare of the nation." The "group of men" happened to be the hundreds of thousands of coal workers that were on strike and the railroad workers that were on the verge of doing the same. Believing the unions were going too far by threatening to strike, Truman demanded the workers settle or he would implement measures such as drafting strikers into the armed forces. Mid-speech, Truman received word that the potential railroad strike had been settled. Days later, the coal strike ended as well. The president would face several more labor disputes during his two terms in office.<br><br> <a href="http://247wallst.com" target="_hplink">Read more at 24/7 Wall St.</a>
2. Truman's Marshall Plan Speech
<strong>Date:</strong> November 17, 1947 <br> <strong>President:</strong> Harry S. Truman <br> <strong>Inflation:</strong> 14.4 percent <br> <strong>GDP 1 yr. growth:</strong> -3.4 percent <br> <strong>Unemployment:</strong> 3.9 percent <br><br> On November 17, 1947, President Truman gave a speech to the 80th Congress, asking to give aid to France, Italy and Austria and to address the country's rising inflation rate. "Today, inflation stands as an ominous threat to the prosperity we have achieved. We can no longer treat inflation-with spiraling prices and living costs-as some vague condition we may encounter in the future. We already have an alarming degree of inflation. And even more alarming, it is getting worse," Truman said. The president went on to address the rising costs of specific items, noting that the average price for all cost of living items had increased 23 percent from the middle of 1946. His efforts were largely resisted by the 80th United States Congress, a group referred to by Truman as the "Do Nothing Congress."<br><br> <a href="http://247wallst.com" target="_hplink">Read more at 24/7 Wall St.</a>
3. Truman On The Steel Industry Dispute
<strong>Date:</strong> June 10, 1952<br> <strong>President:</strong> Harry S. Truman<br> <strong>Inflation:</strong> 1.9 percent<br> <strong>GDP 1 yr. growth:</strong> +3.8 percent<br> <strong>Unemployment:</strong> 3.0 percent<br><br> In 1952, the United Steelworkers of America, working at U.S. Steel and nine other companies, began to strike, demanding wage increases. Prior to his speech, Truman had nationalized the steel industry -- a decision that was quickly overturned by the courts. In his speech, Truman asked that the Congress authorize government operation of the steel mills. This request was not granted and the steelworkers were on strike for 53 days, at which time they reached an agreement with management.<br><br> <a href="http://247wallst.com" target="_hplink">Read more at 24/7 Wall St.</a>
4. Nixon On Economic Policy
<strong>Date:</strong> September 9, 1971<br> <strong>President:</strong> Richard Nixon<br> <strong>Inflation:</strong> 4.4 percent<br> <strong>GDP 1 yr. growth:</strong> +3.4 percent<br> <strong>Unemployment:</strong> 5.9 percent<br><br> In 1971, the United States was in the process of pulling its forces from Vietnam. It was also entering its worst economic period in years, one from which it would struggle to pull itself for more than half a decade. Unemployment was at a ten-year high at the time, and GDP had failed to grow for the first time since 1958. President Nixon addressed Congress, begging for bipartisan support. "As the dangers of war recede, the challenges of peace increase. It is customary for a President to ask the Congress for bipartisan support in meeting the challenges of war. Today I come before you to ask bipartisan support in meeting the challenges of peace." In his speech, Nixon pleaded the Congress to cut taxes on vehicles, subsidize job growth, and cut income taxes. The income tax cuts were not meaningful, and the jobs were not created. Unemployment remained high and would not drop below 1971 levels until the Clinton administration.<br><br> <a href="http://247wallst.com" target="_hplink">Read more at 24/7 Wall St.</a>
5. Ford's Economic Discussion
<strong>Date:</strong> October 8th, 1974<br> <strong>President:</strong> Gerald Ford<br> <strong>Inflation:</strong> 11.0 percent<br> <strong>GDP 1 yr. growth:</strong> -0.6 percent<br> <strong>Unemployment:</strong> 5.6 percent<br><br> In 1974, after a brief period of prosperity, the economy took a serious turn for the worse. For the first time since 1958 the country's GDP contracted. More worrisome than this was that inflation had jumped to 11 percent from the previous year. In his 1974 speech to Congress, Ford stated his desire simply and clearly: "We must whip inflation right now." He wanted to deregulate the economy to increase proficiency and to enact a temporary tax surcharge of 5 percent. His requests were not granted. The next year, unemployment jumped to 8.5 percent, the highest since The Great Depression. Worse still, inflation continued to rise an additional 9%. Economic conditions continued to deteriorate until a year later when Congress enacted a tax cut proposal and a tax rebate. It is this rebate, not Ford's effort, that is credited with ending the recession<br><br> <a href="http://247wallst.com" target="_hplink">Read more at 24/7 Wall St.</a>
6. Carter's Energy Discussion
<strong>Date:</strong> April 20th, 1977<br> <strong>President:</strong> Jimmy Carter<br> <strong>Inflation:</strong> 6.5 percent<br> <strong>GDP 1 yr. growth:</strong> +4.6 percent<br> <strong>Unemployment:</strong> 7.1 percent<br><br> In 1977, the U.S. was between energy crises. The first was the result of the Arab oil embargo in 1973, and the second came in 1979 during the Iranian revolution. Oil prices, which were less than $3 a barrel before 1970, reached $10 a barrel by the mid-1070s. They would more than double by the beginning of the 1980s. With soaring fuel costs on the nation's mind, Carter had addressed the nation with a 10-point proposal to reduce the U.S.'s energy usage in the long term. Carter's suggestions ranged from developing alternative energy sources, including wind power, to avoiding subsidies that artificially reduce energy costs. Most of these proposals failed to get off the ground, and the vast majority of them have not been enacted to this day.<br><br> <a href="http://247wallst.com" target="_hplink">Read more at 24/7 Wall St.</a>
7. Reagan's Speech On Economic Recovery And Inflation
<strong>Date:</strong> April 28th, 1981<br> <strong>President:</strong> Ronald Reagan<br> <strong>Inflation:</strong> 10.3 percent<br> <strong>GDP 1 yr. growth:</strong> +2.5 percent<br> <strong>Unemployment:</strong> 7.6 percent<br><br> The nation faced particularly high inflation in the early 1980s. To address this problem, as well as the moribund state of the economy, President Reagan delivered a speech to Congress. In that speech he pushed for cutting government spending and tax rates, saying, "Our government is too big, and it spends too much." As a result, the Economic Recovery Tax Act of 1981 was passed, albeit to little effect. The economy soon fell further into recession. Inflation remained high and unemployment increased, peaking at an annual rate of 9.7% in 1982. It is possible that the recovery, which started two years later, was the result of Federal Reserve policy and defense spending.<br><br> <a href="http://247wallst.com" target="_hplink">Read more at 24/7 Wall St.</a>
Paul Ryan: QE2 Risks Inflation
Back in 2010, Republican Vice Presidential candidate Paul Ryan explained that the Federal Reserves plan to purchase $600 billion worth of securities -- known as QE2 -- was little more than "sugar-high economics" that <a href="http://www.bloomberg.com/news/2012-08-14/romney-ryan-see-fed-qe-as-inflation-risk-amid-low-prices.html" target="_hplink">risked rising inflation and weakening the dollar</a>. But instead the opposite took place. According to Bloomberg: <blockquote>"Since that prediction by Ryan, who has been chosen by presumptive Republican presidential nominee Mitt Romney to be his running mate, the dollar has risen against major currencies and inflation has stayed below the Fed's goal of 2 percent."</blockquote>
Christina Romer: Unemployment Will Remain Below 8%
In early January of 2009, Christina Romer, economic adviser to then President-elect Barack Obama, made a prediction: massive government stimulus on the order that would eventually be passed by Congress would keep unemployment below 8 percent, reports <a href="http://www.washingtonpost.com/wp-dyn/content/article/2009/01/10/AR2009011001999.html" target="_hplink"><em>The Washington Post</em></a>. Without it, unemployment could reach as high as 9 percent. In July 2012, unemployment edged up to <a href="www.bls.gov" target="_hplink">8.3 percent</a>. It has not gone below 8 percent since <a href="http://www.google.com/publicdata/explore?ds=z1ebjpgk2654c1_&met_y=unemployment_rate&idim=country:US&fdim_y=seasonality:S&dl=en&hl=en&q=us+unemployment+rate#!ctype=l&strail=false&bcs=d&nselm=h&met_y=unemployment_rate&fdim_y=seasonality:S&scale_y=lin&ind_y=false&rdim=country&idim=country:US&ifdim=country&tstart=984805200000&tend=1337227200000&hl=en_US&dl=en&ind=false" target="_hplink">January 2009</a>.
Jim Cramer: Obamacare Will Topple The Stock Market
On <a href="http://mediamatters.org/blog/2010/03/22/dow-finishes-up-following-health-care-vote-pagi/162074" target="_hplink">March 18, 2010</a>, Jim Kramer stated on Larry Kudlow's program that Obamacare would tank the stock market. The reform package was, in his words, "the single greatest impediment to the stock market going higher." On March 23 of that year, according to <a href="http://www.cbsnews.com/8301-503544_162-20000981-503544.html" target="_hplink">CBS News</a>, President Obama signed health care reform into law. Following Yahoo's tracking of the Dow Jones, the market on April 1 2010 was at 10,927. On August 17, over two years later, the Dow Jones Industrial Average was pegged at <a href="http://data.cnbc.com/quotes/.DJIA" target="_hplink">13,264</a>. Granted, the market could still take a nose dive. But odds are it won't be because of health care reform.
Michelle Bachmann: Obama Taking 'The Final Leap To Socialism'
In a radio interview Minnesota Congresswoman Michelle Bachmann gave with Bill Bennet in March of 2009, the Minnesotan claimed that Obama's policies were representing the "final leap into socialism," <a href="http://thinkprogress.org/politics/2009/03/05/36590/buchmann-thwart-obama/" target="_hplink">Think Progress</a> reported. But alas, while Bachmann's sensational claim may have gotten her into the spotlight, the government has been engaged in selling its stake in the industries that it had to temporarily prop up. General Motors, an automaker that the U.S. government had to prop up with emergency capital, bought back all preferred shares held by the U.S. Treasury as of December 2010, reports <a href="http://dealbook.nytimes.com/2010/12/16/g-m-buys-back-2-1-billion-preferred-shares/" target="_hplink"><em>The New York Times</em></a>. Wall Street's largest banks that have frequently brought about wrath from liberals such as <a href="http://www.nytimes.com/2011/07/18/opinion/18krugman.html?_r=1&ref=paulkrugman" target="_hplink">Paul Krugman,</a> like Citi, Goldman Sachs and JP Morgan, are still privately run.
Glenn Beck: U.S. Will Go Through 'Great Depression Times 100' (Or Hyperinflation)
In early 2010, then-Fox News commentator Glenn Beck said that the U.S. was likely in for a "Great Depression Times 100," reports <a href="http://mediamatters.org/mmtv/201001050049" target="_hplink">Media Matters</a>, going on to say that the country would experience a period of hyperinflation. Unemployment during the Great Depression peaked at around 25 percent, according to an article published by <a href="http://www.bls.gov/opub/cwc/cm20030124ar02p1.htm" target="_hplink">the Bureau of Labor Statistics</a>. But even at the worst moments of the Great Recession, unemployment only reached slightly above 10 percent. Presently, it is <a href="http://www.huffingtonpost.com/2012/08/03/unemployment-rate-jobs-report-bls_n_1736843.html" target="_hplink">at 8.3 percent</a>, according to the Bureau of Labor Statistics. With inflation estimated to remain stagnant at 1.5 percent through 2012, the nightmare warnings of hyperinflation expounded by Beck as well as by renowned "economist" <a href="http://www.cobdencentre.org/2010/10/peter-schiff-dollar-hyperinflation-is-coming-unless-policy-direction-is-rapidly-changed/" target="_hplink">Peter Schiff</a> appears to be just that. A nightmare.
Rick Santelli: 'Stagflation Is Almost A Certainty'
In October of 2009, CNBC analyst and Tea Party founder Rick Santelli told said on the show Fast Money that he believed <a href="http://220.127.116.11/id/15840232?video=1287468464&play=1" target="_hplink">"stagflation is almost a certainty."</a> In other words Santelli was predicting that America would go through a period of high inflation and high unemployment. The only question he had was when. In November of that year, <a href="http://www.bls.gov/cpi/cpid0910.pdf" target="_hplink">the Bureau of Labor Statistics</a> revealed that between October 2008 and October 2009, prices rose by 1.7 percent not including food and gas. This made, at the time, Santelli's claim even bolder. Even though unemployment is still high -- almost three years later -- inflation has risen far below the Federal Reserves 2 percent annual target, <a href="http://www.bloomberg.com/news/2012-08-14/romney-ryan-see-fed-qe-as-inflation-risk-amid-low-prices.html" target="_hplink">Bloomberg reports.</a>
Rush Limbaugh: Obamacare Will Leave 250 Million People Uninsured
Among the many predictions conservative radio host Rush Limbaugh has made over the years, the one he made on March 8, 2010 was not one of his best. On his daily radio show <em>The Rush Limbaugh Show</em>, Limbaugh announced to his listeners that healthcare reform, which would be signed into law later that month, would end up leaving 250 million Americans uninsured, <a href="http://mediamatters.org/mmtv/201003080025" target="_hplink">Media Matters</a> reported. As of June 2012, 49.9 million Americans do not have health insurance, <a href="http://www.cnn.com/2012/06/27/politics/btn-health-care/index.html" target="_hplink">CNN estimated</a>.
Mitt Romney: U.S. WIll Default If We Raise Debt Ceiling
In the <a href="http://transcripts.cnn.com/TRANSCRIPTS/1106/13/se.02.html" target="_hplink">June 13, 2011 Republican Presidential Debate</a>, Mitt Romney, when asked about the consequences of not raising the debt limit answered the moderator's question with a question. "Well, what happens if we continue to spend time and time again, year and year again more money than we take in?" As Asher Smith pointed out on <a href="http://www.huffingtonpost.com/asher-smith/republican-debate-economy_b_876899.html" target="_hplink"><em>The Huffington Post</em></a>, this can only mean that the U.S. will eventually be unable to pay off its obligations and, as a result, default. Bit as of August 2012, close to one year after the debt ceiling was raised, the U.S. still hasn't defaulted.
Bill Gross: End Of QE2 Would Cause Bond Yields To Go 'Much Higher'
In March of 2011, PIMCO Co-Founder Bill Gross predicted an imminent spike in treasury bond yields following the end of the Federal Reserve's Quantitative Easing program, <a href="http://finance.fortune.cnn.com/2011/03/02/gross-warns-qe2s-end-could-sink-markets/" target="_hplink"><em>Fortune's</em> Colin Barr reported</a>. Bond yields, Gross told reporters, were likely to go "higher maybe even much higher" at the end of June 2011 when QE2 ended. The 10-year treasury bond yield has since fallen. Since the 2011, 10-year bond rates have hovered between 2.5 and 1.5 percent, according to <a href="http://www.bloomberg.com/quote/USGG10YR:IND/chart" target="_hplink">Bloomberg</a>.
Joe Biden: US Out Of Recession In 18 Months (Feb. '09)
In February of 2009, Vice President Joe Biden predicted that the federal stimulus package being implemented by Barack Obama's administration would "literally drop kick us out of this recession," <a href="http://thehill.com/blogs/on-the-money/801-economy/114661-gop-reminds-biden-of-missed-prediction-on-the-recovery" target="_hplink"><em>The Hill</em></a> reported. "This [stimulus] is about getting this out and spent in 18 months to create 3.5 million jobs." Technically, the recession ended during the third fiscal quarter of 2009, <a href="http://www.bea.gov/newsreleases/national/gdp/gdp_glance.htm" target="_hplink">according to the Bureau of Economic Analysis</a>. But with unemployment hovering around over 8 percent for the last three years, some economists are no longer talking about calling the current economic period a recovery. Brad DeLong, an economist with UC Berkley, told readers on his blog in 2011 that we're now in the midst of a <a href="http://delong.typepad.com/sdj/2011/06/the-little-depression.html" target="_hplink">"Little Depression" instead.</a>
Peter Schiff: Inflation At 20 Percent By 2009
Economist Peter Schiff stated that the Federal Reserves monetary policies would lead to 20 percent inflation within one year. The statement, made in October 2008 on <a href="http://www.youtube.com/watch?v=jB9fuIvksLw" target="_hplink">Glenn Beck's former CNN program</a>, was proven wrong. During 2009, <a href="http://www.tradingeconomics.com/united-states/inflation-cpi" target="_hplink">the U.S. actually experience deflation.</a>
Ron Paul: Beware Of Runaway Inflation
Congressman Ron Paul believed that runaway inflation was "just horrendous" in May 2011, he said during an appearance on <a href="http://www.ronpaul.com/2009-05-12/ron-paul-warns-against-runaway-inflation/" target="_hplink">Fox Business News</a>. <a href="http://www.tradingeconomics.com/united-states/inflation-cpi" target="_hplink">When Congressman Paul made that statement</a>, inflation was pegged at 3.2 percent and, after peaking at 3.9 percent that October, inflation has steadily fallen to 1.4 percent in July 2012.