Home > economics > Beware the fiscal drag…?

Beware the fiscal drag…?

Even Edward Luce at The Financial Times seems to be caught up in fiscal hysteria, claiming in the paper today that the fiscal cliff is acting as “a drag on the US recovery”.

Luce links to another FT article to support this comment, which is not the main thrust of the article but underpins a great deal of it — the idea that the debate is somehow ruinous to the economy and that averting the fiscal cliff is do-or-die moment.

Failure to get at least a two-year reprieve would set up a far more dangerous showdown for 2013 that could make last year look like a dress rehearsal.

However, the article Luce links to cites improved data and weaker consumer sentiment. One is an observable fact and the other is, well, sentiment. It’s hardly surprising that the obsessive media coverage of the fiscal cliff has disturbed folk. But there’s no evidence that businesses are similarly concerned or that the war of words has “acted as such a drag on the US recovery”. (Note the past tense.)

No reasonable person expects the fiscal cliff to have any meaningful effect. The tax cuts will be extended one way or another. The spending cuts will never materialise. Life will go on.

This whole debate is pure politics. It’s important in establishing the pecking order in Congress, perhaps, but has nothing to do with economics.

Consider the positions:

Obama wants to focus on recovery and jobs, ie stimulus, rather than worrying about debts and deficits. Yet he’s the one demanding increased government revenue!

The Republicans are intensely worried about America’s debt burden, yet they’re the ones blocking even modest revenue hikes!

None of it makes much sense…

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