Why Not Just Fall Off the Fiscal Cliff?

As everyone knows by now, considering all the talk by market pundits and business media, fear of falling off the fiscal cliff has become the obsession du jour ever since President Obama won re-election. The threatened results of a failure to resolve the issue – including tax hikes, spending cuts and an almost certain recession – sound so dire that nobody wants the U.S. to fall off that cliff.

Then again, maybe some do. Contrarians and some politicos on both the left and the right have started to ask the forbidden question: Why not just fall off the fiscal cliff?

For example, conservative thinker Marc A. Thiessen of the American Enterprise Institute dared suggest in an opinion piece for The Washington Post on Monday that the best way to start the new year in a bipartisan fashion would be to head over the cliff.

“Today, the only ones in Washington who advocate fiscal cliff-diving are liberal Democrats. It’s time for conservatives to join them. Letting the Bush tax cuts expire will strengthen the GOP’s hand in tax negotiations next year, and it may be the only way Republicans can force President Obama and Senate Democrats to agree to fundamental tax reform,” Thiessen wrote.

True enough, liberal Paul Krugman in a post-election column for The New York Times on Nov. 8 urged Democrats not to make a deal in terms of accommodating Republican demands.

“I don’t mean to minimize the very real economic dangers posed by the so-called fiscal cliff that is looming at the end of this year if the two parties can’t reach a deal,” Krugman wrote. “The looming combination of tax increases and spending cuts looks easily large enough to push America back into recession. Nobody wants to see that happen. Yet it may happen all the same, and Mr. Obama has to be willing to let it happen if necessary.”

Facing What May Become Reality

After the Dec. 31 deadline, if no compromise is reached, both the Bush-era tax cuts and the Obama administration’s payroll tax cut are scheduled to expire. At the same time, $1.2 trillion of automatic “sequestration” spending cuts divided equally between defense and non-defense discretionary programs are set to kick in.

Some market participants are girding themselves to face the reality of Washington gridlock if lawmakers fail to reach any kind of a fiscal cliff compromise, whether it’s a continued kicking of the can down the road or a grand bargain.

For example, Mike Acton (left), director of research for AEW, an institutional investment manager that focuses on real estate, said that contrarians are arguing that if tax rates go back to where they were 10 years ago, it would generate as much as $4.5 trillion of new revenue.

“So if in January the Bush tax cuts went away, that would allow $1.5 trillion of reduction in the debt ceiling as called for by the deficit supercommittee,” Acton said. “They created that as a way to force an agreement.”