Tuesday, November 13, 2012

Is the Fiscal Cliff Unavoidable? Three economists weigh in.

Can the fiscal cliff be avoided? That was a question asked of three economic professors at the annual CEO Council meeting. The short answer is no but there were different reasons offered. Portions of the taped discussion are included below.

Austan Goolsbee, Chairman of University of Chicago's Booth School:

"I'm somewhat pessimistic that they will be able to sort out that bargain in the next two months. I'm afraid there is a serious danger they will go over the fiscal cliff in the short run, because they're the same people and it's the same dynamic as what happened last summer [with the debt ceiling debate]."

Michael Boskin, Economics Professor at Stanford's Hoover School:

"I think it's probably going to be difficult to get the fiscal cliff resolved in a major way in a permanent sense in the next couple of months because as we said last night, the Democrats have a strategic advantage to allow it to expire because the baseline changes. Republicans  also have a different set of incentives."

Robert Zoellick, Senior Fellow at Harvard Kennedy School:

"The people who are doing the negotiating up there on both sides don't know the basics about negotiations. Starting with the fact that you need one piece of paper, not competing pieces of paper that say this is what we agree on, this is what we don't agree on.  If I were CEO, what I would be worried about is, if these people just talk to each other as opposed to negotiate and kind of pontificate about their positions as we see now, I believe the president will be very tempted to say, let the tax cuts expire."

As a bonus, a clip has been included below of a talk given by Richard Koo, Chief Economist of Nomura Research Institute, where he explains why the fiscal cliff may be inevitable. It all ties back to the conservative's focus on cutting government spending. Using Japan's economic crisis of the 1990s as an example, Koo demonstrates how cutting the budget deficit at a time when the private sector is not borrowing only restrains the economy and sends GDP nosediving.

I'll turn this over to Mr. Koo, who does an eloquent job of explaining the entire scenario in ten minutes:

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