Even though the U.S. economy continues to be anemic, the fact that it’s growing at all is impressive to some experts.”After all, the Europe economy seems to be mired in recession, and more than a few Emerging Market economies have faltered of late,” writes Vincent Reinhart, Morgan Stanley’s Chief U.S. Economist.
“This resilience, however, is being tested once again by US politicians.”
Reinhart is referring to the fiscal cliff — the end-of-year expiration of government spending programs and tax cuts that threaten to hack off up to 5 percentage points of U.S. GDP.
However, the discussion alone of the fiscal cliff has been nothing but bad news thanks to all of the uncertainty it has created.
From Reinhart’s note:
Economists sometimes overstate their ability to discern the effects of uncertainty on spending. After all, it is difficult to estimate a relationship between the means of variables, let alone to include a role for variance. However, Washington officials have created a near-perfect laboratory to test the proposition by raising doubts about the big and little pictures. With the legislative clock ticking away, households and firms likely have considerable qualms about income and sales. But micro-aspects of fiscal policy relevant for economic decision-making are also in play, including marginal tax rates, the corporate tax rate, and the treatment of dividends.
Those concerns probably account for the recent slowing in economic expansion…
Unfortunately, the fiscal cliff matter could drag on through 2013. From Reinhart:
For now, our divided government — which prediction markets are betting will continue into 2013 — makes it likely that the initial move would be stop-gap legislation coupled with the promise of a process that will yield comprehensive reform. This could come before the election if disappointing economic results induce sufficient fear among incumbents about their reelection prospects. More likely, action follows the election or even slips into 2013.