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American Enterprise Institute Economist John Makin on the potential impact of reaching the fiscal cliff on the economy.
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Lined pan -- look at a standoff in Washington goes on on next guest says the economic impact of going over that cliff.
Will be worse -- that anyone expects joining us now is John -- economist for the yeah.
Enterprise institute by the -- former consultant to the Treasury Department and the CBO.
John that you say could be worse well we know from a forecast that's -- we go over this -- could very well push this economy back into recession.
The -- can be in the -- Yeah actually this the CBO is saying that if we go over the cliff we to have slow down to about 1% growth in.
First half of the year than we've recovered to 2.3 in the second half.
I think if you look more realistically at the 600 billion dollars in in fiscal tightening we get if we go with the -- And look at some estimates that have been developed in the past several years.
It's more likely that we see negative growth rate -- on the order of two or two and a half percent next year which is a solid recession.
But what -- argument that sequestration kicks in.
We get some -- cuts across the board granted the defense cuts could be you know arguably too much but we get cuts on entitlements we get everything we've been looking for you can argue that that would actually help the economy into the -- No you can -- if you if if you if you hit the economy with fiscal drag worth about four percentage points of GDP.
This I don't think any economist would argue that there we're gonna have faster growth in fact gonna have substantially slower growth even the CBO is there.
So -- I I think it's that it would be a dangerous assumption to make to say let's go over the cliff and we don't have a recession we will have a recession.
Everybody -- I've factors looked at it -- as has been on that side of the issue -- problem is that you know we're gonna have to address the fiscal problems but.
To address -- it's it's sort of like you know if you if you're on drugs and you go cold Turkey off the drugs which is what.
Going over the cliff would would amount to you can have pretty nasty withdrawal symptoms and that would.
Essentially be the economy having a serious recession.
Well -- further away isn't it yeah it obviously got -- -- -- -- -- he's already taken I couldn't you.
Pardon me would you argue perhaps that that's the medicine that we need to take we've been overspending for so long it finally had to work pay the piper.
Of course bad -- if you pay too quickly which is what the fiscal cliff does remember.
We -- we've never seen as 600 billion dollars taken out of the economy overnight all the legislation kicks in then you're gonna get a very slow growth rate.
In fact.
The growth rate will drop so much that you'll see that actually the debt to GDP ratio will probably rise.
After we go over the cliff rather than drop even with the cuts and spend the -- found that out the Spanish rounded out the Italians found that -- posterity is dangerous.
You also know by now how congress works well they really don't.
So maybe it's you know opponent drug from the drug addict let him go through withdrawal and sweat -- out.
It's good for congress -- -- they have no choice at that point.
And we the American people not -- handle things we will rally back no problem and congress -- taken out of the picture.
If we go over the cliff we if it.
And it will first that the first thing that will happen is that every American household will see their take home income go down by 2%.
Will have a you know what we have a very drastic cutback I think we're both going in the same direction we want to get the deficit down.
But going over the cliff -- nobody would propose.
-- cut back this that abrupt end.
And I think again people will rally but they're not gonna be happy about being in -- -- we have session -- the last four years we've had yes that's right.
We can you can get movie I mean you can get more unhappy trust me but let me tell and we -- -- -- -- are coming -- time and well you know that you're.
I'm here you're -- you're -- I -- what I would -- what would make people happy would be to see.
Speaker Boehner and and the president -- -- come up with a good solid proposal.
And I think that's -- -- related industries are eaten I think okay on the ground I'm because that's.
Written uneasily that -- not getting anywhere at this at this point our way.
No we're not and and so I look there's -- there's a difference between are we going over the fiscal cliff or not and how bad will it be.
We've been -- -- about how bad it will be.
If we get it and and I think you know which the probability going over the cliff has gone up.
Pretty fast yeah I'm about 20% -- 50% and really what apple what seems to -- to be happening is that.
The president.
Once those tax rates to go up for the rich.
Boehner is probably willing to give a little bit but from what I can gather it talks like they had last night the president's not coming back with any cover preventative he's not -- you'll do so I think on -- -- has the upper hand.
Well.
If he has the upper hand in the sense that you just say no -- do anything I don't.
The question in my mind is if the president says no and Boehner were to -- and just go with the president's terms.
Could he get.
That through the house.
That I don't think so naturally that's why am nervous that we're gonna go through we're gonna go over the cliff all I'm saying is.
As it as an economist who looks at the effect of this kind of what we call fiscal shock it won't be pretty whole thing.
That you know -- the president will think that this wouldn't be a good thing and maybe he should give something.
In exchange for a modest increase in those top tax rates so that we get an agreement and we don't go over the cliff.
And leave it there rolled dreaming to some extent I don't think candlelight Christmas don't make this week drains yes I think big job thank you so much appreciate -- My pleasure actually good stuff.
