Dive Like an Italian

Repub­li­cans in Con­gress laid down the law in July, 2011: no exten­sion of the debt ceil­ing unless Pres­i­dent Obama agreed to severe fis­cal restraints.

Amongst talk of a $4 tril­lion “grand deal”, talks broke down repeat­edly, and finally Pres­i­dent Obama and Speaker John Boehner made a joint announce­ment: a “super­com­mit­tee” made up of six Democ­rats and six Repub­li­cans, six Rep­re­sen­ta­tives and six Sen­a­tors, would sit down and nego­ti­ate a “take it or leave it” deal for Con­gress to pass with­out mod­i­fi­ca­tion. If the super­com­mit­tee failed to come to an agree­ment by a Thanks­giv­ing dead­line, then the unthink­able would be trig­gered: a deal to cut a half tril­lion dol­lars from Democrat-​​favored edu­ca­tion, trans­porta­tion, and Medicare pro­grams and another half tril­lion from the Republican-​​favored Depart­ment of Defense, on Decem­ber 31, 2012, at the same time $5 tril­lion in Bush-​​era tax reduc­tion would expire in accor­dance with the agree­ment result­ing from a sim­i­lar show­down at the end of 2010. Every­one hated the deal, so it was the best pos­si­ble deal to reach.

There was a brief flir­ta­tion with the debt ceil­ing again early this year, but the Repub­li­cans in Con­gress declined to call atten­tion to it and the ceil­ing was raised with very lit­tle fanfare.

The econ­omy has been grow­ing, albeit slowly, hit­ting a growth rate of 2.2 per­cent dur­ing the last quar­ter. That frag­ile recov­ery is endan­gered, almost every­one agrees, if Con­gress fails to act. As Con­gress is adept at fail­ing to act, that seems a pos­si­bil­ity worth contemplating.

A recent Con­gres­sional Bud­get Office report warns of a “fis­cal cliff” if Con­gress does noth­ing in the next few months. They project that the econ­omy will con­tract by 1.3 per­cent if Con­gress fails to act. Mark Zandi, Chief Econ­o­mist at Moody’s Ana­lyt­ics, esti­mates that eco­nomic growth would be slowed by 4.6 per­cent if the agreed-​​to mea­sures went into effect. Either of these sce­nar­ios would send the United States into a sec­ond reces­sion, per­haps even another depres­sion. (See U.S. Econ­omy, 1937.) (more…)