Is the U.S. headed off a fiscal cliff?

Marketplace Contributor Jun 7, 2012

Is the U.S. headed off a fiscal cliff?

Marketplace Contributor Jun 7, 2012

Kai Ryssdal: Federal Reserve chairman Ben Bernanke took one of his occasional jaunts up Capitol Hill today. He said much of the same stuff he always says when he testifies before Congress. But lawmakers paid a pretty good amount of attention to what’s looming come the end of the year.

Montage: The so-called fiscal cliff. Fiscal cliff. Fiscal cliff.

As things stand now, the Bush tax cuts are going to expire on New Year’s Eve. Which is to say, taxes are scheduled to go up — for everybody.

And on top of that, a trillion dollars in automatic government spending cuts are gonna kick in, thanks to the budget deal from last fall.

That, in a nutshell is the fiscal cliff we may face in early 2013.

The worry is all that spending coming out of the economy is gonna add up to bad things. Bad things as in another recession.

We got our New York bureau chief Heidi Moore on the line to discuss the geography of the federal budget, cliff or otherwise. Hey Heidi.

Heidi Moore: Hey Kai.

Ryssdal: So pick your geographic feature — is it really a cliff, or a slope? I mean, what’s it going to be?

Moore: Yeah, you can call it a canyon, a gully, a ditch — I mean, the question is: Are we going to bungee jump off this thing or what, right? The key problem, as you mentioned, is the spending cuts and the tax cuts that start at the beginning of 2013. So Congress has until basically the beginning of the year to deal with that. And the problem is, there’s problems with calling it a cliff. We know it’s happening in January, but look around: We already have problems, we have high unemployment, we have a weak economy. So it’s not like we’re falling from a really great height. And the economy doesn’t run on our timetable; it’s not as if like the New Year’s ball is going to drop in Times Square —

Ryssdal: And boom!

Moore: Right — ‘Recession! It’s here!’ That’s not going to happen, there’s going to be a lag. So I would say picture it more as a ski slope, it’ll be gradually downward.

Ryssdal: A bunny slope, if you will?

Moore: A bunny slope, even. Except we’re going to hit nothing but empty air if we don’t get it right, which is more like a black diamond slope.

Ryssdal: All right, well help me out then. Why was it that we’ve known about this cliff for a while, you look at the markets — first of all, all day yesterday and then early today, up hundreds of points — what’s the disconnect between what’s actually going to come and what Wall Street and that part of the economy thinks is happening?

Moore: Sure, absolutely. Well what Wall Street wants to see is that lawmakers are paying attention. And from that montage we just heard, they definitely are — they’re obsessing about it, they’re having secret meetings about it, that’s really good. And the other thing that helps is that governments all over the world are thinking about a recession, and so we’re not the only ones worried — there’s China, Australia, Brazil — they all cut their interest rates. Europe has low interest rates. And people in the markets like to see that.

So I talked to Gary Thayer, he’s the chief macrostrategist for Wells Fargo Advisers. He said the fact that Congress is having all these secret meetings is a good sign. Here he is:

Gary Thayer: It sounds inevitable, that this is going to happen, and we don’t see it that way. We see it as a possibility, but not as the most likely scenario.

Ryssdal: Let me pick up, coming out of that piece of tape, because the thing is that everybody knows that Congress isn’t going to actually let this happen, right? But they will delay until the backs are quite literally against the wall — our backs, really. And then it’s going to happen, right? Is that the theory?

Moore: Yeah, basically. Right now Congress is saying, ‘we’ll get to it, we’ll get to it sometime this summer.’ And we’ve heard that before, we know they’re going to get a D on their deadlines, right? They always do. But there’s reason to believe that this is really important. The thing is, they’re trying to decide what’s more important: fixing the economy or getting elected? And in almost every case, it’s going to be getting elected. So they’d rather throw that over to Chairman Bernanke, and of course, you know, he’s well-known for his poker face and he’s happy to harsh everyone’s mellow at any time.

Ryssdal: And he did a lot today — I mean, he put a lot of it back on Congress. He said, you know, ‘Congress, you need to fix this and then we’ll do what we can.’

Moore: Yeah, exactly. And he’s been telling them that before, but the thing is, they’re facing re-election. And he’s not. So they’re happy to throw it back to him and make him the avatar of all this.

Ryssdal: Heidi Moore in New York. Heidi, thanks a lot.

Moore: Thank you Kai.

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