The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates.
In the classic "Rebel Without a Cause," our teenage hero agrees to a "chickie run" where he and Buzz the bully race toward a cliff in stolen cars to see who will bail out last. Unfortunately for Buzz, an entanglement of his jacket sleeve on the car door ends his short, tyrannical life.
A similar drama is playing out today in Washington as the U.S. economy speeds toward the "fiscal cliff" that could be reached on New Year's Day. As revelers awake to face lucky '13, they may find:
- Bush and payroll tax cut expirations
- Dramatic healthcare tax increases
- Sizable spending cuts from the failed "Super Committee"
- Ending of extended unemployment benefits
Taken together, there will be $500 - 700 billion in fiscal contraction - or about 3 to 5 percent of GDP. Considering the economy continues to teeter, a 5 percent adjustment feels like a cliff, indeed.
Republicans and democrats have created this cliff through prior legislative bargains, forcing a showdown of sorts heading into the election this fall. The question is: who will bail out first?
Just like the movie, neither side wishes to fly over the cliff, but both are looking for gains (political in today's case, bragging rights in the celluloid version).
Briefly stepping through election scenarios:
- A sweep by either democrats or republicans will see action move quickly toward lessening the depth of the cliff by adjusting many of its elements quickly
- A split (however you cut it) will be more interesting, driving us closer to danger, but it is difficult to imagine either party wanting blame for a 3 percent or more legislated pullback in economic activity.
So, the fiscal cliff is more than avoidable.
Fortunately, it is difficult to find a scenario that sends us over the fiscal cliff. Let's just hope our Washington leaders wear short sleeves.
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