Why Goldman’s Top Economist Is Worried About What Happens If We Go Into January Without A Fiscal Cliff Deal

cliff sunrise

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Earlier today we published our interview with Goldman top economist Jan Hatzius.In its, he he emphasised that beating the Fiscal Cliff deadline is significant, and that there’s really not much breathing room to go into January.

Here’s that section


BI: On the matter of the fiscal cliff, there’s this idea that “fiscal cliff” is the wrong term; that it’s a fiscal slope – that we can go into January, and as long as we get a deal fairly soon that it’s not too big of a problem. How far can we go into next year without a deal and still feel comfortable that we’re not going to go into a recession?

HATZIUS: I think there’s probably something to that. Purely from the perspective of fiscal policy itself, you can reverse some of these effects, for example, essentially restoring tax rates to where they were a couple weeks after the end of the year.

The problem with the argument, though, is the uncertainty effects and the potential impact on financial conditions – if you went into the first week, second week of January or longer without a sense of how this is going to be resolved, I think the impact on financial conditions would be much more negative.

So I think even though you can reverse the dollars and cents on fiscal issues, I think you could do quite a lot of damage to the economy and I would get worried about a return to recession pretty quickly.

BI: So if we don’t have a deal by the end of January, would we go into a recession?

HATZIUS: I think that would make it pretty likely that you get a contraction in the economy. I mean, how long-lasting will that be, whether it’s that long-lasting enough to be classified as an NBER recession, an officially defined recession, that’s harder to say.

But I do think the economy will be contracting, and potentially contracting pretty rapidly. It’d be a very unpleasant environment.