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:
Date: May 25, 1946 President: Harry S. Truman Inflation: 8.3 percent GDP 1 yr. growth: -10.9 percent (the second worst since The Great Depression) Unemployment: 3.9 percent 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. Read more at 24/7 Wall St.
Date: November 17, 1947 President: Harry S. Truman Inflation: 14.4 percent GDP 1 yr. growth: -3.4 percent Unemployment: 3.9 percent 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." Read more at 24/7 Wall St.
Date: June 10, 1952 President: Harry S. Truman Inflation: 1.9 percent GDP 1 yr. growth: +3.8 percent Unemployment: 3.0 percent 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. Read more at 24/7 Wall St.
Date: September 9, 1971 President: Richard Nixon Inflation: 4.4 percent GDP 1 yr. growth: +3.4 percent Unemployment: 5.9 percent 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. Read more at 24/7 Wall St.
Date: October 8th, 1974 President: Gerald Ford Inflation: 11.0 percent GDP 1 yr. growth: -0.6 percent Unemployment: 5.6 percent 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 Read more at 24/7 Wall St.
Date: April 20th, 1977 President: Jimmy Carter Inflation: 6.5 percent GDP 1 yr. growth: +4.6 percent Unemployment: 7.1 percent 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. Read more at 24/7 Wall St.
Date: April 28th, 1981 President: Ronald Reagan Inflation: 10.3 percent GDP 1 yr. growth: +2.5 percent Unemployment: 7.6 percent 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. Read more at 24/7 Wall St.