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Early Thoughts on the Fiscal Cliff Deal….

Now that the clowns have left the tent we can make some brief assessments on the fiscal cliff:

  • A deal was actually finalized.  That’s good news.  It looked like we might actually go into January without a deal and that the odds of no deal at all were rising.
  • No one really won here.  Congress is totally dysfunctional.
  • There’s still a lot unanswered.  In particular, this doesn’t deal with sequestration or the debt ceiling.  So, this drama is far from over….
  • Ultimately, the big news is that the worst case scenario with $575B in cuts didn’t pan out.  That means the worst case austerity scenario didn’t occur.  That’s very good news.
  • BUT, this bill is more austere than current policy.   The biggest hit to the 2013 budget deficit is the payroll tax cut expiration which comes in at $126B and reduces middle quintile incomes by roughly ~$700.   Goldman’s Jan Hatzius has also said this will shave 0.6% from 2013 GDP.  Not good for an economy that is muddling through.
  • The other big chunks are the Affordable Care Act and the partial expiration of the Bush Tax Cuts which adds up to about $100B.
  • If my rough math is right we’re looking at something in the range of $225B in cuts out of a potential $575B.
  • The total drag on the economy (using the CBO’s fiscal multipliers and Goldman Sachs estimates) is ~1.3%.
  • Using the CBO’s “Alternative Fiscal Scenario” we’re still looking at big budget deficits in 2013.  I’ll let the CBO run the final numbers here, but my back of the napkin math points to something in the $950B-$1T range.
  • Remember, we’re in a balance sheet recession so government budget deficits are driving corporate profits to an unusual extent while private investment recovers.
  • The bottom line: this could have been much worse.  Unfortunately, it’s not completely over.

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