Blog

Over the Fiscal Cliff and Back…to the Edge

0 2237 Market Intelligence

Bernie Markstein

Positions: Chief Economist
Well known for his work as Senior Economist and Vice President of Economic Forecasting and Analysis for the National Association of Home Builders (NAHB), Dr. Markstein has provided analysis on national and regional housing issues; tracking developments, trends in the multifamily housing market and forces affecting building materials prices.

Economists

Reed Construction Data Chief Economist Bernie Markstein analyzed the fiscal cliff dilemma.

How do you kick half a can down the road? Maybe it is an indication that metaphors go only so far, but Congress managed to do just that.

On January 1, the nation technically went over the fiscal cliff (yet another metaphor that has its limits). The President and leaders of the House and the Senate were unable to reach a compromise in time to pass legislation that would help avoid the fiscal cliff, the automatic return of income tax rates to pre-George W. Bush-era rates, and the sequester, a massive mandatory across-the-board cut in federal spending. Eventually, they struck a deal. Legislation passed both houses on New Year’s Day and was signed into law the next day.

The bill addressed the tax part of the issue with a tweak. Income tax rates for families with adjusted gross income (AGI) taxable income (TI) below $450,000 and individuals with AGI (TI) below $400,000 were permanently lowered to the Bush tax rate cuts, leaving rates unchanged. Tax rates for income at and above the defined levels were raised back to the Clinton-era tax rates.

That’s half the can.

The other half is the sequester, which was kicked down the road two months. Because of the need to figure out what spending should be reduced and by how much, the timer on the ticking time bomb of the sequester has been reset to the end of February. (We’ve been mixing metaphors all along here, so why stop now?) Two months may seem like a long time, but then Congress and the President had an entire year to deal with the original fiscal cliff and still did not meet the deadline. However, without such deadlines nothing happens.

There had been some hope that resolution of the fiscal cliff issues would include raising the federal debt ceiling. That was not done and, as a result, the nation may reach the debt ceiling before the end of February. Hitting the debt ceiling would have the more immediate effect of stopping most federal outlays. Various payments will not be made, including federal civilian and military salaries, Medicare reimbursements, Social Security checks, and debt payments. The last would lead to a technical default on U.S. government debt. The sequester, on the other hand, has a lesser immediate impact, allowing some adjustments in the short run and allowing the continuation of debt payments and issuance of new debt.

The Treasury does have some ways to delay hitting the debt ceiling—a few months at best—but the pain will become evident very quickly.

We are already experiencing some of the pain. In the second half of last year, as the fiscal cliff approached, many businesses delayed investment and avoided hiring, fearing a potential downturn in demand due to the impact of higher taxes. The result was slower growth than might have occurred if not for the uncertainty created by the failure to resolve the fiscal cliff issues earlier. With spending cuts still up in the air, uncertainty about the economic outlook remains, creating an unnecessary drag on the economy and commercial construction. The approach of the debt ceiling compounds the concerns. Washington’s “resolution” of the fiscal cliff up to this point has not inspired confidence in the outcome.

Until these issues are resolved, businesses will continue to delay hiring and investment. No company wants to undertake the commitment of investing in new plant and equipment when a new, self-inflicted recession may be just around the corner.

by Bernie Markstein

Related tags

Leave a comment

Or register to be able to comment.