Summing Up
It is not as though the US has not made a fiscal blunder before. After the terrible economic collapse that ran from late 1929 to early 1933, the U.S. experienced a solid rebound in national output during the following four years. Unfortunately, policy blunders killed the recovery before it was complete. President Roosevelt was deeply concerned about the sizable federal budget deficit after his reelection in 1936, and he implemented a series of large tax hikes, many of them focused on the business sector. Those policies contributed to a severe recession in 1937-1938.
The American people are rightfully worried that current federal fiscal policy is unsustainable and could push the U.S. into a financial crisis in the near-future. My view is that the U.S. would benefit from a steady pace of fiscal tightening, but the pace in any one year should be moderate. If the U.S. goes off the fiscal cliff in January 2013, that would be a more rapid fiscal adjustment than the recovery could withstand. It would produce an unnecessary and undesirable recession.
Going off the fiscal cliff makes no economic sense, and I think the best bet is that the U.S. will manage to avoid going off the fiscal cliff. But as James Dean's Jim Stark character understood, sometimes senseless things happen, sometimes mistakes are made, sometimes bad things happen to good people.
Brian Horrigan, PhD, CFA, is chief economist of Loomis Sayles & Co., a Boston-based company that manages more than $172 billion in equity and fixed-income assets for institutional and mutual fund clients.
1Qualified dividends must meet IRS qualification standards, be paid by an American company or a qualifying foreign company, and comply with a dividend holding period requirement.
2Congressional Budget Office, "Economic Effects of Reducing the Fiscal Restraint That Is Scheduled To Occur In 2013," May 2012.
3From Tax Policy Center, a nonpartisan research group located in Washington, DC.
4Zachary A. Goldfarb, "As 'fiscal cliff ' looms, debate over pre-Election Day layoff notices heats up," Washington Post, July 30, 2012.