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U.S. could be heading off a fiscal cliff in 2013

Jeremy Hobson May 17, 2012

Jeremy Hobson: Well we’ve talked all about the debt problems in Europe, but right now we’re going to talk about some debt warnings right here in the United States.

Adolfo Laurenti, deputy chief economist with Mesirow Financial is with us now from Chicago. Good morning.

Adolfo Laurenti: Good morning.

Hobson: Well Adolfo, we’re hearing I guess from the Federal Reserve and from lawmakers in Washington that there’s a fiscal cliff coming at the end of the year. What does that mean?

Laurenti: Beginning next year, we are going to face a twofold challenge. First of all, the Bush tax cuts are set to expire, which may result in higher taxes for all the taxpayers. And second, we’ll hit again the debt ceiling. Now, following the debacle of 2011, Congress is setting to delay some of automatic and fairly draconian reductions in federal spending that will follow. So at the time, we may face both the tax increase and deeper spending cuts, and that in a nutshell is the fiscal cliff we may face in early 2013.

Hobson: So if that happens then, and we do face those two things, what does that mean for the economy?

Laurenti: Depending on the combination of the two, we may face some fairly headwinds on economic growth in GDP. Some estimate 1 to 2 percent in reduction of activity, and the economy’s already fairly fragile. We are just growing a little bit above 2 percent, so that might be a major hit.

Hobson: And I assume, Adolfo, that all this is mood — if one party gets a decisive win in the election?

Laurenti: Yes. In theory, one party may sweep both Congress and the White House and fix these issues, but in practice, we look at the polls, and that doesn’t seem to be a likely scenario. Depending on how the combination of the White House and Congress’ House and Senate will play out, we may have a different combination. But you know, gridlock and the spend-off between the Republicans and Democrats really makes the possibility of a fiscal cliff to become very, very real.

Hobson: Adolfo Laurenti is deputy chief economist with Mesirow Financial. Thanks as always.

Laurenti: Thank you.

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