Fiscal-Cliff Winners and Losers

I'm not sure who won the fiscal-cliff battle and don't much care--I suppose it was either the Democrats for raising taxes on the rich or the Republicans for entrenching the Bush tax cuts for everybody else. But it's easy to say who lost. That would be the country as a whole.

Actually, it lost twice over. First, because of the uncertainty generated by the ongoing fiscal shambles. And second--a point that seems to have escaped the attention of Democrats who are usually sound on this subject--through the premature fiscal tightening that's just been applied to the economy. As Gavyn Davies explains, this amounts to nearly 2% of GDP, front-loaded in the current calendar year, and that's before any additional tightening that might follow the forthcoming debt-ceiling farce.

The upshot is a fiscal tightening in the US this year which is as large as any imposed in a single year by the UK coalition government, and larger than planned by any other major economy in 2013. The effect on GDP growth is not to be sneezed at, especially since fiscal multipliers seem to be unusually high at present (as IMF Chief Economist Olivier Blanchard once again argued here last week).

The US is likely to do better under this premature tightening than the UK has done, Davies says, because its export markets are stronger and its private sector is running down its financial surplus faster. Nonetheless, it's a mistake that will cost jobs and could have been avoided.

But look on the bright side. At least the rich will be paying more taxes.

Presented by

'I'm As Hardcore New York As You Can Possibly Get'

A short documentary about an electric violin player who busks in New York City's subway.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register with Disqus.

Please note that The Atlantic's account system is separate from our commenting system. To log in or register with The Atlantic, use the Sign In button at the top of every page.

blog comments powered by Disqus

Video

The Horrors of Rat Hole Mining

"The river was our source of water. Now, the people won't touch it."

Video

What's Your Favorite Slang Word?

From "swag" to "on fleek," tweens choose.

Video

Cryotherapy's Dubious Appeal

James Hamblin tries a questionable medical treatment.

Video

Confessions of Moms Around the World

In Europe, mothers get maternity leave, discounted daycare, and flexible working hours.

Video

How Do Trees Know When It's Spring?

The science behind beautiful seasonal blooming

More in Business

Just In