The perils of cliff
The fiscal cliff is a danger canada goose black friday sale to the economy. https://www.canadagoosejacket-outlet.ca Some have Canada Goose Online argued that cliff diving is benign either because the cliff itself is an illusion it is really a gentle canada goose clearance slope or because Canada Goose online policymakers have the cartoon like power to reverse going over the cliff without hitting the abyss.
Both arguments miss the key role that Canada Goose Parka would be played by financial markets. Cliff diving would have a significant impact on financial markets, impairing asset values, exacerbating credit stringency and Canada Goose sale amplifying the direct effects on the Main Street economy. These effects cannot be “unwound” by retroactively canada goose coats on sale legislating away the fiscal cliff.
Taken at face canada goose uk shop value, Canada Goose Jackets the fiscal cliff is a large negative policy shock. The tax increases are nearly $400 billion and the spending cuts about $145 uk canada goose outlet billion. The total, $540 billion is roughly 3 percent of gross domestic product. For perspective, trend economic growth now appears to be buy canada goose jacket cheap less than 2 percent but certainly nowhere close to 3 percent.
If one uses the multiplier estimates of Christina Romer and Paul Romer roughly three going over the fiscal cliff would trigger a decline in the economy of $1.6 trillion roughly 10 buy canada goose jacket percent of GDP. This would be biggest year to year decline since 1932.
diving
But there are good reasons to take that with a grain of salt, however. First, the size of multipliers is controversial, canada goose coats and they may be much smaller. But even a multiplier of 1 yields a canada goose clearance sale $540 cheap Canada Goose billion decline a recession of 3 percent.
Second, the duration of the recession is unclear. If Congress adopted a new fiscal policy quickly, the recession could be canada goose factory sale short lived. So, for example, a 3.5 percent recession at an annual rate that lasted canada goose uk outlet only through January, and was quickly reversed, would be a mere blip on the economy growth path.
Taken together, these arguments raise the hope that going over the fiscal cliff could be reversible and have a modest overall effect. Unfortunately, the potential for significant financial market fallout substantially changes the outlook for cliff diving.
Financial markets react essentially instantaneously. Hence, the moment it becomes obvious that the economy is going over the cliff recall the horrific sight of the markets crashing as the TARP vote failed we should anticipate that equity markets will fall, and the riskiness of various classes of debt will be re evaluated.
Unlike Canada Goose sale budgetary moves that can be reversed, these kinds of negative effects on market canada goose confidence in the outlook are durable. Many analysts, for example, attribute at least part of the slowing cheap canada goose uk in the 2nd half of 2011 to a decline in consumer confidence because of the political battle over uk canada goose raising the debt limit.
Thus, if policymakers drive the economy over the fiscal cliff, the pure multiplier analysis on the real economy should be augmented by negative financial market canada goose store impacts that are potentially quite large and long lived.
The real danger of a renewed recession raises the stakes on reaching a deal. It even shapes the kind of deal that is desirable.
Congress and the president should reach a canada goose uk black friday grand bargain that trims the future debt next year. For now the focus should be on temporarily extending current policy, dodging the cliff dive and averting a self inflicted recession.
PHOTO canadian goose jacket (Top): The Dow Jones Industrial Average on a board at the New York Stock Exchange at the Canada Goose Outlet end of the trading day, October 15, 2008. Wall Street had its worst day since the 1987 stock market crash. REUTERS/Brendan McDermid
PHOTO (Insert): A weary trader outside the New York Stock Exchange at the end of trading October 9, 2008. The Dow dropped 678.91 Canada Goose Coats On Sale points that day to finish at 8579.19, closing below 9,000 for the first time since 2003. REUTERS/Mike Segar.
