Election 2012: The Day After the Debate

Wednesday night’s presidential debate provides a lot of fodder for Thursday discussions. It was certainly interesting no matter your political persuasion. We should all keep in mind that as powerful as the president is, economic power largely resides with both chambers of the U.S. Congress; Congress has to decide what they are going to do about the fiscal cliff and the taxes we pay. 

There has been a spate of articles addressing what Congress might do. A brief synopsis includes: doing nothing, “kicking the can down the road,” or act in a manner that promotes a long-term solution. 

Doing nothing would be a terrible idea and is only likely to happen if partisan politics creates an unbreakable gridlock. The result would be an immense tax hike that negatively affects consumer spending in 2013, and contributes to a recession in 2014. Flow through businesses would also be negatively impacted, hurting job creation and economic growth.

A “kick the can down the road” action (providing short-term resolution that pushes off real reform to years later) is entirely possible. Taxes might go up on high-income earners but everything else, including sequestering, would be deferred for further study. This would keep the uncertainty that has plagued capital expenditure decisions in place, but the downside impact would not be as bad as doing nothing.

Decisions by Congress that attempt a long-term solution sound like the best idea, but remember that with these decrees, there will always be consequences. A long-term resolution needs to include reduction in federal spending and a mechanism for increasing federal revenue. Both help resolve fiscal issues, but each would slow economic performance when implemented. In fact, enough austerity to remove the budget deficit in the next decade would likely result in steep recession in the U.S. Therefore, while this type of action would stabilize U.S. fiscal spending for the long-term, the steps to achieve this goal are painful. 

There are no easy answers, even though either presidential candidate might say otherwise. Austerity is painful, free spending is deadly. Those are the two choices.