Why the Fiscal Cliff Is So Important

11/12/2012 10:30 am EST


Andrew Busch

Editor-in-Chief and Publisher, The Busch Update

The fiscal cliff has the potential to drag down the US economy at the precise time the rest of the world is relying on it to keep global growth going, says Andrew Busch.

We’re at the World MoneyShow in Chicago and I’m talking with Andrew Busch about the fiscal cliff. Now we hear a lot about the fiscal cliff. But I’m not quite sure: A) people really know what it is; and B) what the implications are for it.

Well, the fiscal cliff is a series of tax changes that are coming to the US economy. It depends on how you calculate it, but the way that we look at it, it’s about $1 trillion that will be moved from people to the government if it all hits at the same time.

This runs from the Bush tax cuts rolling off to fixing AMT—alternative minimum tax—to all sorts of things that kind of add up to about $1 trillion. And if you look at it, it’s about 4% of GDP...so if you’re looking at GDP, if GDP was running at 2.5%, you’d lose about 1% off of that so you’re at 1.5%.

That’s significant because Christine Lagarde, the head of the IMF, said this is the biggest risk for 2013. In other words, if the US economy slows down by 4% to 5%, then the rest of the world essentially catches the cold. It’s really disconcerting for them as far as growth prospects going forward. So that’s why there’s a lot of focus on it, and I think that’s why we’ll get some action by Congress before the end of the year.

Yeah, we’re the strongest engine in this weak economy at this point in the global economy.

Yeah, we really are. And that really stands out when you look at growth rates in Europe, when you look at China slowing down significantly. The US still is the best place, and we’ve got some good things going on here. The housing market looks like it’s stabilized.

We’ve seen the economy improve—not great, but it’s not falling off a cliff. That’s a good thing, too. Finally, we do have a central bank that’s easing and will continue to ease unlimited until they comfortable with growth going forward. So those are three positive things that are happening.

So on the political side of this, what are the hot button issues? Who is really...I mean is the Tea Party involved in any of the issues that are on the table here? Are there splinter groups that are making this more difficult to get through, or...?

You've got to remember, the Tea Party got involved because the American people were very upset with the fiscal deficits that were expanding and blowing out. We’re talking about over $1 trillion a year for the last four years in a row. You can blame some of that on the Bush administration, you can blame the rest of it on the Obama administration.

The thing is with the Tea Party, they rightfully came to the fore because they wanted to change that dynamic. So yes, they’re involved with this process, and yes, it comes in the House of Representatives.

But I think overall, they’re pointing us in the right direction. We cannot sustain these debt levels. We cannot sustain these deficit levels. So the Tea Party, they do take an extreme position to the extent that they don’t want to have any taxes go up. But I think they pulled the conversation of where it needs to go.

Right, and it’s kind of what we’re seeing happen in Europe at this point, where they had a social network in place and they had their social democracy but they couldn’t afford it when things got tight, and now they’re trying to dig themselves out of it.

Right, and I think that’s a great point. Forever, we’ve heard Europe has this different social contract with their population and it’s great. You want to spend that amount of money, fantastic. But you can’t do it and accumulate a lot of debt, because it’s unsustainable.

So at some point, you have to have the conversation that Canada had in about the 1990s, when they said, "What can we do for our people and what can we afford?" And Canada’s really been the shining star as far as balancing that out. They don’t have it perfect, but they really are a great example not only for the fiscal situation, but also in their banking system as well.

So those are all good things to keep in mind when we’re looking at the United States.

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