Why is it called a “fiscal cliff”? Because our nation’s economy has been relentlessly advancing toward a figurative precipice from which it will take a deep dive if Congress fails to strike a new budget deal by Jan. 1.
Why did the Dow Jones Industrial Average rise by more than 200 points Monday, bouncing back a bit from a post-election slump?
Because investors, rightly or wrongly, increasingly believe that the legislative accord needed to save us from the fiscal cliff will be reached in time.
Let’s hope they were right on Monday — though the market fell slightly Tuesday.
President Barack Obama did hold a “summit” last Friday on this pressing concern at the White House with Senate Majority Leader Harry Reid, Senate Minority Leader Mitch McConnell, House Speaker John Boehner and House Minority Leader Nancy Pelosi. Afterward, presidential spokesman Jay Carney said the meeting was “constructive.”
OK, as recipes for optimism go, that’s rather thin gruel.
But if this week’s encouraged investors are mistaken and a budget compromise isn’t achieved by year’s end, major federal tax increases and spending cuts will automatically take effect. That double whammy would inflict serious damage on a recovery already long burdened by high unemployment and anemic growth.
And even if Democrats go along with deeper spending cuts and Republicans go along with some tax hikes to find common ground short of the cliff’s edge, the mere threat of falling from it has already done significant harm.
Many companies, large and small, have been scaling back on expansion plans over fears that a budget deal won’t get done in time.
And even if such an accord is reached, some executives worry about the tax-code changes it could bring.
In other words, the business sector is holding back — still — on capital investment due to its uncertainty about federal fiscal policy.
But beyond the immediate fiscal-cliff menace lies this defining long-term dilemma: Washington’s inability to pay its — and our —way.
In Fiscal Year 2008, we set a record with a $455 billion federal deficit.
But in each of the four years since, the deficit has eclipsed $1 trillion, adding more than $5 trillion to a national debt that’s now $16 trillion and still rising.
That red-ink flood doesn’t just imperil the U.S. marketplace.
It imperils the global economy.
As David Seaton, CEO of Fluor Corp., a major engineering/construction enterprise, told The Wall Street Journal this week: “The whole world is looking for stability and clarity from the United States.” Without it, he warned: “People will sit on their war chests of cash and return it to shareholders.”
Federal Reserve Chairman Ben Bernanke echoed that alarm in a Tuesday speech to the Economic Club of New York, explaining: “The realization of all of the automatic tax increases and spending cuts that make up the fiscal cliff, absent offsetting changes, would pose a substantial threat to the recovery.”
Thus, the sooner Congress eliminates the threat of going over this fiscal cliff, the more likely businesses will invest in expansion — and jobs.
And while righting our fiscal ship over the long term is the overriding mission, at this perilous point, avoiding a costly plunge off the Jan. 1 fiscal cliff must be Job One.