How seriously should we take the fiscal cliff? Ben Bernanke first
used the phrase in January 2012. The deadlock between the White House
and Congress over how to deal with the mounting fiscal deficits of the
previous decade postponed any decision until after the November
presidential elections.
Andrew Gamble
Elections have now passed but haven’t resolved anything, merely
confirming the division of power between Republicans and Democrats in
Washington. If nothing can be agreed by December 31st major
tax cuts will automatically lapse, and there will be deep spending cuts
in all federal programmes, including welfare and defence. This could
provide a sizeable deflationary shock at a time when the weak recovery
is just getting established.
The idea that US politicians could inflict such harm on the economy
because of a failure to compromise seems so bizarre that many observers
assume it will not happen. There will be a last minute deal, or another
postponement of the need to make a decision.
