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The Threat of a Politics-Provoked Setback

February 13, 2013 3 minute Read by John Prestbo

The stock market and assorted talking heads seem to think the fiscal cliff will be averted before year-end. But what if the negotiating drags on? What if the details aren’t finalized until sometime in 2013? In that case, U.S. economic growth could slip into reverse during the first quarter. That’s the warning from Barron’s economic columnist Gene Epstein. He notes that whatever the negotiators agree on, and Congress enacts, has to be translated into tax-filing regulations, instructions, forms, and guidelines by the Internal Revenue Service. Any delay in nailing down loose ends will mean a corresponding postponement in filing tax returns and, therefore, in the distribution of tax refunds. “In the first quarter of this year, the Internal Revenue Service cut checks totaling $212.8 billion to 75.3 million taxpayers, with each check averaging $2,826,” Epstein writes. “Over the past four quarters, consumer spending in nominal dollars has increased by an average of $90 billion per quarter. If $100 billion in refund checks gets deferred, that alone could put consumption in negative territory.” That, of course, would be on top of the rescission of the tax holiday on payroll taxes, “which will reduce take-home pay by an average of $30 billion per quarter,” according to Epstein. And then the rise in tax rates on, say, 2% of the population could siphon another $25 million in consumer spending. The result, he cautious, is that “you have the makings of an economic downturn in the first quarter.” Consumer spending — which makes up about 70% of the U.S. economy — would rebound whenever the refund checks finally arrive. But that might not be enough in a single quarter to erase the effects of a first-quarter reversal. How many new jobs will businesses create if managers see consumers starved for cash? The ripples can spread far and wide. This potential situation spotlights the difference between politics and governing. When the former screws up the latter, everybody except the politicians is at least inconvenienced and perhaps made to suffer. Expecting our government to work smoothly should not be among the problems we need to address. Neither should we have to worry that a politics-provoked economic setback could lengthen our quest to accelerate U.S. economic growth.


Author

John Prestbo
John Prestbo

2012 Economic Growth Fellow

John Prestbo is retired as editor and executive director of Dow Jones Indexes. Previously he was markets editor at The Wall Street Journal. He has co-authored or edited several books over the past 30 years. The most recent is “The Market’s Measure: An Illustrated History of America Told Through the Dow Jones Industrial Average,” published in 1999 by Dow Jones Indexes. His column, Indexed Investor, appears on the highly regarded “MarketWatch” business and finance website. He received his bachelor's and master's degrees from Northwestern University.

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