The Most Avoidable Threat to the Economy

We know three things about the upcoming fiscal cliff:

  1. On Jan. 1, $440 billion in tax hikes and $108 billion in across-the-board federal spending cuts will go into effect automatically, due to the structure of existing laws.
  2. Nearly every economist agrees that this will be devastating to the economy.
  3. Congress and whoever wins the presidential election could avoid it all, as they will claim to desire. And while they probably will, a deal won't be struck until the nation is gripped with a terrifying showdown of threats, name-calling, blame-laying, and other pranks.

Last summer's debt ceiling showdown provides a good road map. If you're fortunate enough to have forgotten, here's a recap.

The federal government has issued a self-imposed debt ceiling since the 1930s. Ever since, the cap has been little more than symbolic, being raised on average every nine months for the last half-century. It's usually raised with little fanfare or fuss from either party. But in today's momma-said-knock-you-out political climate, things are different. Both parties pulled out the howitzers for one of the ugliest political brawls in history. We came literally within hours of voluntarily defaulting on the national debt before a deal was struck -- and not before the maturity of Congress was laid bare for Americans to view, our jaws planted firmly on the floor.


It's difficult to measure exactly what this did to the economy, but here's what we know:

Source: Visage.

And again:

Sources: University of Michigan and the Federal Reserve.

And again:

Source: Bureau of Labor Statistics.

Maybe these charts don't reflect anything to do with the debt-ceiling debate. Correlation isn't always causation. But we know without much doubt that these showdowns have at least some real impact on businesses.

We also know that the upcoming fiscal cliff is already affecting businesses. Take these snippets from a recent New York Times article:

Hubbell, a maker of electrical products, has canceled several million dollars' worth of equipment orders and delayed long-planned factory upgrades in the last few months, said Timothy H. Powers, the company's chief executive. It has also held off hiring workers for about 100 positions that would otherwise have been filled, he said.

"The fiscal cliff is the primary driver of uncertainty, and a person in my position is going to make a decision to postpone hiring and investments," Mr. Powers said. "We can see it in our order patterns, and customers are delaying. We don't have to get to the edge of the cliff before the damage is done."

It cites Eaton (NYS: ETN) as another example:

"We're in economic purgatory," said Alexander M. Cutler, the chief executive of Eaton, a big Ohio maker of industrial equipment like drive trains and electrical and hydraulic systems. "In the nondefense, nongovernment sectors, that's where the caution is creeping in. We're seeing it when we talk to dealers, distributors and users."

As a consequence, Mr. Cutler lowered Eaton's projected results for 2012 in late July, adding that he sees particular weakness in the heavy-duty truck market. "I don't think there's any question the economy is starting to see an impact from the fiscal cliff," Mr. Cutler said. He noted that as companies retreat, the effect is multiplied by the impact it has on other sectors, like restaurants and hotels.

The plural of "anecdote" is not "trend," as the saying goes. Nearly all surveys show the top concern among businesses is slow sales, with government uncertainty a ways down and close to historic norms. But however small the impact the fiscal cliff is on business, the bigger point is that it's completely avoidable. That the Bush tax cuts would expire has been known since they were enacted a decade ago. That large spending cuts would occur in January has been known for more than a year. Effectively nothing has been done to quell the impact of either, despite both parties' agreement that something should be done.

A Gallup poll last week put Congress' approval rating at an all-time low of 10%. Makes you wonder what those 10% are thinking.

The article The Most Avoidable Threat to the Economy originally appeared on Fool.com.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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