Photo: Flickr/Gage Skidmore
The biggest threat to the U.S. economy is the fiscal cliff. As Morgan Stanley’s Adam Parker explained in a note today, there’s a very plausible scenario where 5 per cent of GDP is lopped off, and corporate profits get absolutely shredded. And this assumes that the debt ceiling is passed without creating a gigantic shock to the economy.The U.S. economy faces other issues, but this is the biggie right now. And given that the main crisis facing the U.S. is unemployment (and more specifically long term unemployment) another big leg down would be devastating, reopening scars that are healing terribly already after the crisis of 2008-2009.
The best scenario for avoiding a fiscal cliff mess is to see Mitt Romney elected. As we argued back in early April, the surest way to get Republicans on board with ongoing deficits is for them to be the party in power again.
History seems to be pretty clear on one issue: Parties out of power favour austerity. Parties in power favour stimulus.
A newly elected Mitt Romney and a Republican Congress would sail past the fiscal cliff with the fewest disruptions possible, insuring ongoing stimulus and deficits.
But now Mitt Romney has tapped Paul Ryan to be his running mate, and since then, at least 4 people have asked us whether we still think that Mitt Romney will be the spending and deficits candidate, given Ryan’s proposals to get the U.S. back to a balanced budget.
The answer is still yes. And in fact, the pro-deficits case for Mitt Romney may be more powerful than ever.
In a column at Bloomberg View, Josh Barro speculated about Paul Ryan’s Role in Romney’s Secret Economic Plan.
The gist: Because Paul Ryan has budget credibility, he’ll be a messenger from the Romney White House to feisty House conservatives that they have to play along with stimulative budgets:
As Secret Economic Plan sceptics routinely point out, conservatives are never fully going to trust Romney. If he comes to them with, say, economist Glenn Hubbard‘s proposal to throw about a hundred billion taxpayer dollars at restructuring underwater home mortgages, they’re likely to resist.
But what if Vice President Paul Ryan makes the pitch? Won’t House Republicans be much more likely to conclude that mortgage bailouts actually are conservative?
I’m not suggesting that Ryan is going to throw conservatism entirely under the bus. Romney surely wants to do some things that Republicans in Congress will love and others they will be resistant to—only part of his economic plan is secret. So both sides of Ryan’s skill set will come into play.
Not having Ryan in the House also definitely helps Mitt Romney roll House Republicans on stimulus issues.
And there’s more to this idea than just a theoretical notion that Ryan will be a useful tool.
When the going gets tough, Paul Ryan has a role in dropping his ideology in favour of ongoing support to the economy. As we noted last night, Paul Ryan was just one of 20 House GOPers to bravely support TARP.
Last summer, when the debt ceiling fight was reaching its climax, who did House leadership turn to to convince House Freshmen that they needed to raise the debt ceiling? That’s right: Paul Ryan.
The U.S. recovery remains weak and needs support. A hard fall off the fiscal cliff could easily put it back into recession.
If Obama is elected, not only will there be divided government, you’ll have Republicans who are more furious than ever that they blew it by nominating a moderate. And you’ll have the new leader of the Republican party—Paul Ryan—right there in the House looking to cement his role and launch his own race for 2016.
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