The Economist   Fiscal policy   
      
    Cliff-diving   
      
    The election will determine whether a nasty dose of austerity   
    can be avoided   
      
    May 5th 2012 | /WASHINGTON, DC / | from the print edition   
      
    AMERICANS have watched austerity sweep Europe with a certain   
    /Schadenfreude/. But eight months from now they may get a dose   
    of the same medicine. The political compromises that have   
    produced much of America's deficit of 8% of GDP are programmed   
    to go into reverse at the end of the year, two months after the   
    ...   
    The economic impact of this fiscal cliff is a matter of some   
    debate. The Congressional Budget Office reckons that the   
    combined effects of the sequester and the expiring tax cuts   
    would add up to 3.6% of GDP in fiscal 2013. But David Greenlaw   
    of Morgan Stanley, which puts the total effect at almost $700   
    billion at an annual rate, argues that the calendar-year impact   
    is much larger, at around 5%. Others think the effect would be   
    ...   
      
    Even the lower estimates could easily be enough to tip the   
    economy back into recession. Mr Greenlaw says the closest   
    precedent was in 1968, when individual, corporate, excise and   
    payroll taxes collectively rose by the equivalent of 3.1% of   
    GDP, mostly to pay for the Vietnam war and to damp down   
    inflation. The next year, the economy fell into recession.   
      
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    Note: The 1969 fiscal year, which actually began in 1968, had a   
    balanced budget, partly because of those tax increases. That was   
    the last balanced budget this country saw until Clinton.   
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    In America in 1968, as in Europe today, austerity was an   
    explicit goal. It is not so in America now. Although both   
      
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    The goal was to pay as you go. The result was recession. As it   
    always is, for government. Think about it.   
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    parties seem prepared to let the stimulus measures expire,   
    neither party wants all the Bush tax cuts to end, or the   
    ...   
      
    If Barack Obama is re-elected, he will presumably be more   
    willing to let the Bush cuts expire than he was during his first   
    term.   
      
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    His great failure, not letting the tax cuts expire the first   
    time around.   
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    He may well not have to worry about the Treasury hitting   
    its debt ceiling until next February.   
      
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    Which he could deal with easily, if he was willing to go toe to   
    toe with Boehner and the republican party. And tell the Tea   
    Baggers to get screwed.   
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    ...   
      
    If Mitt Romney wins, Republicans, who would probably in that   
    case control the Senate as well as the House, would have no   
    incentive to negotiate with a lame-duck president. They would   
    wait until Mr Romney is sworn in, then (retroactively) make the   
    Bush tax cuts permanent, insulate defence spending from the   
    sequester, and repeal Mr Obama's health-care reform using a   
    parliamentary process that cannot be filibustered. All that   
      
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    Followed shortly after by the Romney recession, then the Romney   
    depression if he doesn't loosen up fast.   
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    The full force of unintended austerity would bite, for at least   
    a few months.   
      
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    Or a decade.   
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   BOB KLAHN bob.klahn@sev.org   http://home.toltbbs.com/bobklahn   
      
   ... Republicans are working to turn America into a third world country.   
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