"Kee" Points with Jim Kee, Ph.D.

Last week the Bureau of Economic Analysis (BEA) released the “advance” estimate for third quarter GDP, which came in at 2 percent, an improvement over the second quarter’s 1.3 percent. This essentially confirms the “low growth but no deterioration from here” scenario. That also seems to be the outlook for the immediate future (next 12 months) shared by the majority of economists, with the next quarter being particularly challenging due to election uncertainty and fiscal cliff concerns. 

And on that note, I get more questions about the fiscal cliff now – the automatic tax increases and spending cuts slated to take effect in 2013 – than any other topic. So I thought it might be helpful to do a “once over lightly” outline of what appears to be the most likely scenarios, depending upon election outcomes, according to the most of the research that I see (Congressional Research Service, Pimco):  

  • Agreed upon (generally) by BOTH Republicans and Democrats:
  • Extend Bush tax cuts for those making less than $250,000 annually
  • Extend Alternative Minimum Tax (AMT) patch, which reduces the number of taxpayers subject to the AMT by increasing exemption amounts
  • Do not extend payroll tax cut of approximately 2 percent
  • Do not extend Unemployment Insurance Extend Tax Extenders like R&D tax credit (which allows deduction of R&D expenses from taxable income in order to encourage R&D spending)
  • Extend “Doc fix” which maintains Medicare reimbursement rates for physicians

If Democrats win the White House and Congress, add:

  • Do not extend Bush tax cuts for those making greater than $250,000
  • Repeal  Medicare sequester (across-the-board spending cuts to Medicare)
  • Partly repeal Defense spending sequester
  • Repeal non-Defense spending sequester
  • Implement Affordable Care Act (Obama Care) on schedule

If Republicans win the White House and Congress, add:

  • Extend Bush tax cuts for those making greater than $250,000
  • Implement Medicare sequester (across-the-board spending cuts to Medicare)
  • Repeal  Defense spending sequester
  • Implement Non-Defense spending sequester
  • Repeal Affordable Care Act (Obama Care)

Impacts: Most of the economic impact estimates that I have seen involve scenarios ranging from -.5 percent (half a percent) off of GDP to 5 percent, depending upon which of the many possible scenarios unfolds. My own view is that the reduction in uncertainty, regardless of scenario, will result in more investment, spending, and employment than many expect, and that will mitigate (but probably not eliminate) some of the negative effects. We’ll never know the actual impacts, of course, because no matter what happens, different analysts will always say that the impacts that they expected occurred relative to “what would have been otherwise,” that nebulous “out” that all of us forecasters have used at one time or another in our careers!