Speaking this week at the Western Economic Association International, economic forecaster Allen Sinai talked about the damage the “fiscal cliff” of 2013 will cause the economy. Sinai concludes that a recession is unavoidable if Congress does not act to fix the fiscal cliff.
The fiscal cliff has two components: (1) Taxmageddon, a $494 billion per year increase in tax increases set to take effect on January 1, 2013, and (2) federal spending cuts of about $135 billion.
In the large-scale economic model that Sinai’s Decision Economics Inc. uses to predict economic growth and fluctuations, the fiscal cliff has catastrophic consequences, but those consequences are not symmetric.
In Sinai’s model, a $350 billion tax increase—Sinai’s analysis shows that even a modest estimate of the 2013 tax increases has a huge, negative economic impact—would lower growth in 2013 by two percentage points and by more than two percentage points in 2014. The negative effects would persist until the long-run trend aspects of the model outweigh the effects of current policy. Given that growth in the U.S. has hovered around 2 percent throughout the recovery-less recovery, a $350 billion tax increase alone would reduce growth to zero for years.