Hint of Resolution
Much of the angst right now in the US markets - and elsewhere - concerns the imminent "fiscal cliff", the combination of the expiration of the 2001-03 Bush tax cuts and President Obama's payroll-tax holiday, together with large, indiscriminate reductions in defense and other government expenditures. These "automatic" policy changes - the result of intransigence on the part of each of the two US political parties - will occur - in the absence of legislative intervention - between January 1st and 15th, 2013. All in all, they would exert a significant contractionary effect (about 5% of GDP) on the US economy. The issue is one of timing - monetary policy is unprecedentedly expansionary in the face of sluggish growth and persistently high unemployment, and to be effective it requires support at this point from fiscal policy. Much tighter fiscal policy to reduce the US public sector deficit is essential, but implemented over a 5- to 10-year horizon, not as a "cliff", falling over which could lead to another recession. Already, "cliff" uncertainty has stifled corporate planning, investing and employment, despite record company cash balances.
Policy makers in Washington all know this. But in a political environment where policy compromise seems simply not doable (especially over the next two months), remedial action has appeared remote. Except, this hint of resolution has just emerged - from a relatively under-the-radar business group, led by Kathryn Wilde, called the Partnership for New York City. Ms. Wilde has been quietly negotiating with prominent political figures on both sides of the spectrum, including Treasury Secretary Tim Geithner, Democratic House Minority Leader Nancy Pelosi, House Majority Leader Eric Cantor, and numerous business leaders, to seek this elusive compromise. Her prediction at this point is for a partial deal soon that would provide at least a base for thorough resolution in the early months of 2013. Some tax increases could be part of this process, a concession by Ms. Wilde's group that could ensure bi-partisan support.
The upside to the markets of an announcement that the fiscal cliff has been avoided, or mitigated, should not be underestimated.