Don’t Jump!

Yesterday Bartlett advocated jumping off the fiscal cliff to force compromise between the parties. Ryan McCarthy pushes back, focusing on how the uncertainty is affecting the business climate:

The problem with this approach is that there’s some evidence that congressional ineptitude has already hurt the US economic mood. Top US CEOs have less confidence in the economy than at any point in the last three years. Gavyn Davies sees signs in August’s economic data that companies are holding off on capital expenditures because of concerns about the fiscal cliff. (Ed Yardeni agrees.) Treasury prices, according to BofA, are already beginning to price in fiscal risks. And all summer, we’ve read more than a few scary features that suggest businesses have started pulling back.

Meanwhile, James Pethokoukis recalls what happened the last time America fell off a fiscal cliff:

[It] led to a recession.

… [And] keep in mind the U.S. economy was far more robust heading into the 1966-67 downturn than it would be right now. Then it was growing around 5% a year. Today? Barely 2%. The downturn was also an important milestone in what turned to be a long-period of economic decline for the United States. That’s reflected in the stock market’s horrible performance from 1966 through 1982. It basically when nowhere in nominal terms …

Simon Johnson agrees that the consequences could be severe:

[T]his will definitely be destabilizing to world financial markets – making people more concerned about risk both in the United States and around the world. Anyone who pays a “risk premium” when they borrow – including American home buyers and euro-zone governments – is likely to be affected negatively. Uncertainty and fear will increase, slowing the economy in the United States and perhaps contributing to yet another round of crisis in Europe. The stock market will presumably fall.

What's more, says Johnson, going over the cliff is likely to diminish the status of the dollar as the international reserve currency.