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 (NYSE: 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.

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.


Read/Post Comments (13) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 23, 2012, at 5:07 PM, tweenthelines wrote:

    There have always been cliffs; what a perfect time for the corporations to show their mettle without government help. Have they not been clamoring for government to "get out of the way"? Or has that just been a politcal talking point?

  • Report this Comment On August 24, 2012, at 3:08 AM, Risky88 wrote:

    It seems to me that the more corporations say government please stay out of our lives.

    The more corporations or our very own employer

    want to

    control our lives

  • Report this Comment On August 24, 2012, at 10:08 AM, kahunacfa wrote:

    First a Quick Comment about TMF's web-site:

    IT LIES. On Log-in via fool.com when clicking on the User-Name/PW box. TMF says: LOGIN SUCCEDED followed by: This page will close in 2 seconds.

    <b>Two Full-minutes later this comment box had not yet opened.</b> And, Yes, I did use a stop watch. So my Question to TMF = WAMYTMF???!!! Where WAMY=What's a Matter You?

    Connection: High-speed full, duplex, satelite 64-bit encrypted T1 link -- over the Pacific Reagon, Kalua-Kona 96745

    Now to the article comment:

    The "fiscal Cliff" should remain in place. Yes, it WILL negatively impact the economy -- especially slower Consumer Spending; more importantly Business Spending. 1 juillet 2012, I founded and started a new Venture Capital Limited Investment Partnership. The are three General Partners, all former CEOs and/or CFOs of Private & Public Investment & Technology companies from 1977 to the Present.

    Hiring, and staffing Associate-Level Staff will only take-place after the funding Goal is achieved and the first closing of the Fund, currently scheduled on or before 31 de'cembre 2012.

    Kahuna, CFA

    Disclosure: Yes this is kind of about an Investment Fund offered ONLY to Corporations, Pension Funds and Fully Accredited <SEC Act of 1934> Investors.

    <B>THIS IS NOT A SOLICITATION OF INVESTMENT of any kind</B>

    The General Partnership will hire Associates for staff starting next year, if and only if, the VC Funding process moves quickly. The first three investments have already been identified, curret General Partners are the Current CEOs or CFOs.

    The "fiscal-cliff" has little to no effect on the Partnership -- Except Institutional Funding may take longer than called-for in the Partnership's Business Plan. -- Taxes do not really affect Funding because nearly all of the Prospective Limited Partners are Corporations, but mostly Tax-Exempt Pension Funds.

    Kahuna, CFA

    Kailua-Kona 96745

  • Report this Comment On August 24, 2012, at 10:23 AM, PaulH7171 wrote:

    Morgan, you wrote:

    "We came literally within hours of voluntarily defaulting on the national debt . . . ."

    My understanding is that even if the debt ceiling had not been raised, the government could have prioritized payments in such a way that we could have gone several more months without defaulting on the national debt, thus giving Congress sufficient additional time to work out a deal. Is this not correct?

    Based on this understanding, I didn't worry about the debt ceiling debate at the time. I figured that if it was the only tool that the House of Representatives could use to force the Senate and the president to reign in spending, then I was in favor of them using it.

  • Report this Comment On August 24, 2012, at 10:31 AM, TMFMorgan wrote:

    <<Is this not correct?>>

    We had been prioritizing payments since that April by not making contributions to government pension funds. In the days leading up the deal the Treasury had less cash on hand than several American businesses. It would have been default.

  • Report this Comment On August 24, 2012, at 10:54 AM, wolfman225 wrote:

    I know I'm not nearly as educated on economic matters as you are but I can't see how eliminating the debt ceiling would be of any advantage for the economy, unless not having any discussion of our total indebtedness makes it easier for the average American to ignore the looming problem, continue to spend beyond their means, and remain comfortably ignorant.

    I don't believe the Eurozone countries had any such self-imposed debt limits. We can see how well limitless borrowing worked out for them.

    Without at least an acknowledgement of the seriousness of the levels of future taxpayer obligation being run up by our "representatives", we will not be able to avoid sharing the same fate.

  • Report this Comment On August 24, 2012, at 11:04 AM, TMFMorgan wrote:

    <<I don't believe the Eurozone countries had any such self-imposed debt limits. We can see how well limitless borrowing worked out for them.>>

    Most Eurozone members have debt-to-GDP levels below that of the United States. As a whole, the EU's debt/GDP is 20% lower than the US.

  • Report this Comment On August 24, 2012, at 11:05 AM, mdk0611 wrote:

    I'm not sure what you can do about the Senate, but an underreported cause of these problems are gerrymandered House districts. This leads to compromise = death primaries.

    Another issue involving Congressional primaries in many states is the exclusion of independant voters. California has made major changes, and a few states have allowed independants to vote in the primary of a party of their choice. Adopting this nationwide will help.

    But as this campaign has gotten progressively dirtier and less focused on the issues (as opposed to attack ads) I'm concerned that both sides wil lbe willing to dive off the cliff in December out of spite, if nothing else

  • Report this Comment On August 24, 2012, at 11:30 AM, PaulH7171 wrote:

    Hi Morgan,

    Thanks for your reply. That information is certainly news to me, and it conflicts with some analysis that I read at the time of the debt ceiling debate. However, I have found you to be a reliable source of information, so I will assume that you are probably correct.

  • Report this Comment On August 24, 2012, at 11:35 AM, TMFMorgan wrote:

    Here's some more info Paul:

    The government started borrowing against pension funds once the debt ceiling was hit early in the year:

    http://www.washingtonpost.com/business/economy/treasury-to-t...

    The debt ceiling was hit in April. From April to July, the government technically ran a deficit without borrowing by delaying payments to other obligations.

    By July the Treasury had less cash than Apple:

    http://tech.fortune.cnn.com/2011/07/29/the-u-s-treasury-has-...

  • Report this Comment On August 24, 2012, at 11:53 AM, PaulH7171 wrote:

    Thanks, Morgan. I will take a look at those links.

  • Report this Comment On August 24, 2012, at 12:33 PM, slpmn wrote:

    To "Most Avoidable" you could also add "Greatest in the last 100 years", "Completely Political", and "Embarrassing on a Geopolitical Level". Had I not just witnessed the amazingly stupid debt ceiling debate, I would not think it a serious possibility. However, I witnessed it, and I would lay odds that if one party does not completely control congress and the presidency after the election, we will witness another, even more dangerous episode of Washington theater that takes us to the brink.

    If the ridiculous "fiscal cliff" weren't hanging out there, I would be highly bullish on stocks. As it is, I'm eyeballing gold. Actually, I'm not really eyeballing gold. I'm not that paranoid. But still, it's pretty annoying.

  • Report this Comment On August 27, 2012, at 5:26 PM, wolfman225 wrote:

    <<Most Eurozone members have debt-to-GDP levels below that of the United States. As a whole, the EU's debt/GDP is 20% lower than the US.>>

    And this is supposed to reassure me, how? If our own debt/GDP is so much greater than other economies already on the verge of collapse?

    It's widely expected that the US will come to the rescue, if necessary. Either by direct payments or loans and loan guarantees through the ECB (ie, bailouts). We do not have the money. We haven't had it for a long time. I know many say that as long as we remain the issuers of our own currency we will never not be able to pay our debts. That's a fallacy. What happens when the rest of the world realizes that the US market may not be the safe haven they perceive? The Fed's printing of more dollars to "juice" the economy won't work any more than you or I continuing to write checks on an overdrawn account at the bank.

    It's definitely a cause for worry. Sooner or later, unless we begin to institute a rational monetary policy, the US dollar will no longer be the world's reserve currency. What are we going to do when no one wants to accept the counterfeit currency put out by the government? The rest of the world, combined, hasn't got the resources to bail us out. Even if they were so inclined, which I doubt they would be.

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