Tags: Wessel | Fiscal | Cliff | Confidence

WSJ’s Wessel: ‘Fiscal Cliff’ Might Permanently Damage Investor Confidence

By    |   Friday, 10 August 2012 05:22 PM

Any decision by lawmakers to address a fast-approaching combination of tax hikes and spending cuts retroactively after elections won't repair the damage the so-called fiscal cliff will inflict on the country's confidence, said David Wessel, a Pulitzer-Prize-winning reporter, columnist and economics editor at The Wall Street Journal.

At the end of the year, tax breaks including the Bush-era tax cuts are scheduled to expire right at the very same time automatic cuts to government spending scheduled over a year ago kick in, a combination known as a "fiscal cliff" that could send the country right back into recession next year.

The Congressional Budget Office has said the economy could shrink by 1.3 percent in the first half of next year, which would technically be a recession, if Congress does nothing to address the fiscal cliff.

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Lawmakers have avoided addressing changes to taxes and spending in an election year, though some have suggested dealing with it after elections or even early next year on a retroactive basis.

Successfully dealing with the problem retroactively would do nothing to alleviate the damage that uncertainty surrounding the cliff would impose on confidence. And even weaker confidence could further dampen an already tepid recovery.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

"There’s some people who think we can go over the fiscal cliff and then, in January, with all this pressure, they can cut a deal and undo the spending cuts and undo some of the tax increases and so forth. And mechanically that’s possible," Wessel told Newsmax.TV in an exclusive interview.

"What I think that misses, though, is a great deal of confidence whacks [the economy] would take. In other words, it’s fine to say, ‘We’re going over the fiscal cliff, but don’t worry. By January 29th, we’ll have pulled back.’ If they go over the fiscal cliff, a lot of people aren’t going to be sure that they’ll be able to take the car back and pull it over the cliff," Wessel said.

Nervous consumers and business owners across the country will hold off on spending and crimp a need for investing and hiring, which is what the economy needs to hasten the recovery and cut stubbornly high unemployment rates.

"It would have far-reaching implications in the financial markets and in the public confidence in the institutions of government that maybe some of the politicians don’t understand," said Wessel, author of "Red Ink: Inside the High-Stakes Politics of the Federal Budget.”

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What the economy needs to do is narrow gaping deficits with what Federal Reserve Chairman Ben Bernanke has described as a two-fisted fiscal policy that doesn't focus too much on raising taxes or too much on cutting spending.

Such a policy would include some government spending when the economy needs a boost and some tax hikes when better days return.

"A little help for the economy now, when it needs it. And some pretty severe restraint on spending and, perhaps, some tax increases that would take effect when the economy’s stronger," Wessel said.

"That would be the recipe for sound fiscal policy that would probably help the economy more than hurt it. Unfortunately, the political parties seem to be unable to reach anything that looks anything like that, at least so far."

Editor’s note: To order ‘Red Ink’ at great price — Click Here Now.

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Friday, 10 August 2012 05:22 PM
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