In a little more than three weeks, the nation faces the so-called "fiscal cliff," a set of tax and debt deadlines.
"Caused by the intersection of three major deadlines and a potential debt showdown, the final impact of the 'fiscal cliff' is still largely unknown," reports the Office of Economic and Demographic Research of the Florida Legislature in its Dec. 3 "Florida: An Economic Overview."
The office continues: "The Congressional Budget Office, the Federal Reserve Board and the International Monetary Fund all project that, if left intact, the collective impact of these events would be to throw the United States back into recession."
In a Wall Street Journal opinion column today, former Federal Reserve Vice Chairman Alan Blinder agrees.
"Dear Congress," he begins.
"Please don't drive our economy off the fiscal cliff."
Blinder, a professor of economics and public affairs at Princeton University, served from January 1993-January 1996 as a member of President Bill Clinton's original Council of Economic Advisers and then as vice chairman of the Federal Reserve Board.
He served with former Federal Reserve Board Chairman Alan Greenspan, who was succeeded in 2006 by current Chairman Ben Bernanke, who popularized the term "fiscal cliff."
National Public Radio host Linda Wertheimer interviewed Boston Globe language columnist Ben Zimmer on Nov. 20 about the origin of the term.
Zimmer said the term was popularized in February when Bernanke warned of the coming "fiscal cliff" that would take effect with the spending cuts and tax increases.
"But the term itself has actually been used for a few decades to refer to various types of budget crises," Zimmer said, according to a transcript of the interview.
"There was a Dallas Morning News editorial in 1975 when New York City was on the verge of bankruptcy. And it was talking about what would happen if New York City went over the fiscal cliff. So it's been a powerful metaphor for a while now," Zimmer said.
Blinder wrote today that by taking 3-4 percent of total spending out of the economy, "a recession is very likely to follow."
"People like me won't lose their jobs, or even take a pay cut. Neither will you – at least not until the next election. But millions of Americans will, and that's the main point," he wrote in the open letter to Congress.
"If we fall into another recession in early 2013, while we are still digging out from 'the big one,' the unemployment rate will begin its climb from a base near 8 percent. How does 11 percent unemployment sound to you?"
Blinder makes three suggestions:
• Avoid the cliff by settling on the broad outlines of a budget agreement "and then kicking some cans down the road. Specifics can come later."
• As "earnest money" toward an eventual deal, "join hands and enact something Republicans dislike and something Democrats dislike."
• Third, extend the debt limit at least until the budget deal is completed, which could take months.
Blinder said such a plan leaves blanks to be filled and still "plenty to argue about. But please hurry. We want you home for Christmas."
He signed it "A Concerned Citizen."
Below, four area experts discuss the fiscal cliff. We want your opinion, too. Would falling off the fiscal cliff lead to a recession? Vote at jaxdailyrecord.com and share your thoughts on our Facebook page, Jax Daily Record.
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| The experts say... | Define the "fiscal cliff." | Who is responsible for avoiding the fiscal cliff? | What happens if the nation falls off the fiscal cliff? | Will the fiscal cliff be avoided? |
| Roman Cech Professor of Economics Florida State College at Jacksonville | The "fiscal cliff" is a combination of policy changes that will take effect the beginning of 2013. First, Bush-era tax cuts will expire, leading to increasing tax revenue from several sources. Second, large spending cuts will result from a sequestration negotiated as a part of the debt ceiling compromise in the summer of 2011. Together, these changes amount to a textbook case of a large contractionary fiscal policy. | Just like every other change in fiscal policy, it is a joint responsibility of the president and the Congress to avoid potential negative effects of the fiscal cliff. | Our analysis shows that the full contractionary impact of the fiscal cliff could cause a recession of 1.5 percent in the first half of 2013, followed by a weak recovery in the second half of the year. Avoiding the fiscal cliff altogether by extending the current tax rates and spending would result in a pronounced acceleration in economic growth, largely driven by the residential construction and demand for durables. Finally, the extension of selected tax and spending provisions would keep economic growth anemic at about 2 percent throughout 2013. | This question is outside the realm of economics, but it seems that the political grandstanding prevents an effective solution before the New Year. |
| Carol Dole Associate Professor of Economics Chair, Sport Business Department Jacksonville University Davis College of Business | The fiscal cliff is the impending expiration of the Bush tax cuts and automatic spending cuts due to take effect Jan. 1. The changes are the result of a standoff between Republicans and Democrats who couldn't agree on a deal regarding the deficit and the debt in 2011. The cliff refers to a perilous position in which the economy will find itself should these changes occur. | Congress and the president are responsible for dealing with the cliff. Citizens who have continued to send politicians to Washington who have allowed deficit spending to occur for the past 30 years are also responsible. To avoid the cliff, citizens and politicians need to face reality about what's affordable. If we don't take care of the debt, our creditors eventually will. | We'll find out if the Congressional Budget Office's prediction for a recession will take place in 2013. The office has projected that the tax increases along with the spending cuts will decrease real GDP in the near term, but allow for significant deficit reduction over the next 10 years. | There appears to be little common ground in the proposals made by the president and the House so far. Given that the holidays are approaching and each side would like to return home, I don't see an agreement taking place in the next 10 days. I think each side has convinced itself that the other side will be blamed for a failure of a deal to materialize. |
| Paul Mason Professor of Economics University of North Florida Coggin College of Business | The fiscal cliff involves the automatic tax increases and spending cuts scheduled to take effect Jan. 1. | The president and the Congress. | Likely a new recession more associated with the signal that the politicians still cannot agree instead of the impacts of the taxes, but business investment will continue to be weak. | I think there will be an agreement but it won't prevent taxes from going up and leading to continued uncertainty and weakness. |
| Rodney McLauchlan Founder, board member Legacy Trust Family Wealth Offices | The expiration of tax cuts and mandatory spending cuts, set to go into full effect at midnight Dec. 31 are known as the "fiscal cliff." Tax cuts entail the end of select tax breaks for individuals and businesses, including the expiration of last year's temporary payroll tax cut. Spending cuts entail across-the-board cuts in domestic spending (totaling $55 billion) and defense spending (totaling $55 billion). | The executive branch and Congress are the primary responsible parties. Rather than proactive, their decision-making process has become extremely reactive and hyperpartisan. A less obvious answer is the unrealistic expectations of the U.S. electorate. The national election resulted in the same government leadership and same divided government. | Economic estimates are that the combination of tax increases and spending cuts could entail a meaningful drag on GDP anywhere from 1-5 percent or worse. With GDP growth right now at a weak 2 percent, a recession is a likely outcome. Recessions reflect a business slowdown and can bring bear markets (defined as a 20 percent drop in market prices). | Likely to be avoided. Three current possibilities: immediate deal to be cut (unlikely), Band-Aid deal with the real deal pushed off until the spring (likely and then we will be back to dealing with the debt ceiling), and no deal reached whatsoever before year-end (i.e. fiscal cliff). On a positive note, history suggests that so much negativity eventually leads to enormous buying opportunities. |