Fiscal Cliff at a stand-still

By Marcos Gonzalez

Fiscal cliff negotiators are aiming at a four trillion dollar deficit reduction over the next ten years. The researchers at Bloomberg Government say that debt will continue to rise as a share of the country’s GDP if only four trillion dollars are cut out of projected deficits. Lowering the debt-to-GDP ratio to 60 percent would require $9 trillion in deficit reduction between now and 2022, they say.

This is something that neither political party wants to hear. Simply getting to four trillion dollars in deficit reduction is proving politically impossible.

The U.S. economy is too weak now to absorb lots of deficit reduction. Joseph Brusuelas, a Bloomberg economist, writes that the scheduled tax increases are “likely to have greater impact than generally acknowledged.” In a stronger economy rising taxes would have a smaller impact on spending. He estimates that unemployment is likely to reach 9 percent by next summer if the fiscal cliff isn’t dealt with.

The fragility of the economy is why Congress and the White House are trying to stop or soften the Jan. 1 fiscal cliff of automatic spending cuts and tax increases. The longer the deficit-cutting pain is postponed, however, the bigger the eventual cuts will have to be to achieve any given amount of savings, whether it’s $4 trillion, $5.9 trillion, or $9 trillion.

On a more optimistic note, Bloomberg Government finds in a second report that even $4 trillion worth of deficit reduction would benefit business by reducing interest rates in the long run.

Right now rates are extremely low because the economy is weak, but as the economy recovers, big deficits could push up interest rates as the government takes in the available funds from lenders. That’s known in the trade as the government’s “crowding out” of private-sector borrowing.

Image Courtesy: AP Images