BEYOND THE NUMBERS
Virtually every macroeconomic analyst’s preferred outcome would be a “Grand Bargain” that replaces the fiscal cliff with a credible alternative that phases-in the deficit reduction over a period of years.
…Should a negotiated settlement on long-run deficit reduction fail to materialize during the lame duck session, the most likely alternative might be a simple extension of current fiscal policy. While such an outcome would improve the near-term economic growth prospects, it would also relieve the pressure to agree to credible deficit reduction and substantially worsen the longer-run outlook. The best outcome, therefore, might be the expiration of current fiscal policies to create real pressure for both parties to work together and quickly reach a “Grand Bargain.”The Carlyle analysts are realistic, however, and recognize that the success of such a policy depends critically on lawmakers convincing market participants that their plan is indeed credible. (Here are our principles for making deficit-reduction efforts credible — that is, more likely to be effective and sustainable over time.) Our reports end on a remarkably similar note. Carlyle says
While the fiscal cliff would be a near-term disaster, an extension of 2012 fiscal policy that fails to address increasing indebtedness could actually represent the worst long-run outcome.We say
The greater danger is that misguided fears about the economy going over a “fiscal cliff” into another Great Recession will lead policymakers to believe they have to take some action, no matter how ill-conceived and damaging to long-term deficit reduction, before the end of the year, rather than craft a balanced plan that supports the economic recovery in the short term and promotes fiscal stabilization in the intermediate and longer run.