All the economists and pundits are sitting on the edge of their seats wondering if President Obama and House Speaker John Boehner will cut a last minute deal on the federal budget to avoid going over the fiscal cliff. The widespread assumption is that going over the cliff would be a terrible thing, while a budget deal would save us from catastrophe and might even give the economy a boost.
Though I share the consensus that going over the cliff would be bad, I am not sanguine that a likely budget deal would be much better. There is a tendency to get so wrapped up in the political game that we overlook the underlying economic reality. The fact is -- no matter what we do, it is going to hurt.
We must keep in mind how we got into this quagmire in the first place. The Bush Administration began throwing billions at the recession on their way out the door, and the Obama Administration upped the ante considerably. Now our government is spending over $1 trillion more each year than it takes in, adding vast sums to our already towering national debt. If this unprecedented stimulus were rejuvenating our weak economy, it might be justified. But the economy remains stuck in low gear despite all the red ink and we all know we cannot continue at this level of deficit spending indefinitely.
The Tea Party deserves credit for one thing -- putting the deficit on the front burner. The Republican Party leadership may well defy the Tea Party's opposition to any tax increases, but it remains committed to deficit reduction. In their more candid moments, even President Obama and the Democrats agree on the need for fiscal restraint. There is virtual unanimity on this point. We can all take some comfort in this reality consensus.
But no matter how we construe the fiscal medicine, it will not go down easy. If we go over the cliff, it will result in about $500 billion in tax increases and spending cuts. If Obama and Boehner cut a deal, it will likely entail at least that much in tax increases and spending cuts. The final deal might rearrange the balance between tax increases and spending cuts, but one way or the other we will still be taking half a trillion dollars out of the economy. That will inevitably dampen economic growth.
Ergo, I do not anticipate that a last minute budget deal will dramatically boost the markets or inspire consumers and business executives to invest. An agreement to raise the debt ceiling would evoke some optimism, but even that could be short-lived. Behind all of the political posturing lies a structural fiscal crisis and spending problem that must be dealt with. We cannot kick this can down the road any longer.
Come January, the tax increases and spending cuts will begin to bite, and the bite will grow deeper and more painful as the year wears on. Of that we can be certain, regardless of whether Obama and Boehner make a deal.
Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements. December 2012