Economists, politicians, and everyone in between have been sounding alarms about the fiscal cliff, the impending year-end expiration of government tax cuts and spending programs that threaten to lop off around 3-5 percentage points off of GDP growth in 2013.
However, UBS economist Drew Matus wonders if we’re blowing fears out of proportion.
In a new research note, Matus reminds us of another time when the world feared that all hell would break loose at a year-end.
Is “fiscal cliff” another “Y2K”?
Generally speaking, widely anticipated problems do not materialise if they are addressed. Pessimists’ warnings about a possible yearend “fiscal cliff” implicitly assume the upcoming November elections do not much resolve fiscal policy political gridlock. Instead we believe that either victorious party probably will be in an improved position to negotiate steps averting the “fiscal cliff”. Politicians know that voters are far more swayed by the economy than the budget deficit problem, which should be again deferred as public policies ultimately prevent “falling off a cliff”.
Y2K was the fear that computer programs around the world would not be able to handle the transition from 1999 to 2000.