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Thelma & Louise

09/28/2012

In that 1991 movie classic, two women choose certain death driving over a cliff rather than continue living in grinding disappointment.  At year-end, our country faces a similar decision.

Remember:  good economic policy requires both monetary policy AND fiscal policy.  Monetary policy is controlled by the Federal Reserve, which can make decisions much more easily than Congress, which controls fiscal policy.  The inability of Congress to compromise and control fiscal policy is driving the country over the cliff.

It is hard to think about the fiscal cliff without first thinking about the election.  If either party makes a clean sweep of the White House and Congress, then we might avoid the cliff.  If not, we will have continued gridlock and certainly go over the cliff, assuming the Republican Party remains a hostage of the Tea Party.

If we go over the cliff, I see three scenarios.  First, there is the pessimistic scenario of a 5-6% recession, not as bad as the last one but still quite bad.  Of course, the longer Congress refuses to compromise, the worse the recession will be.

Second, there is the cynical scenario.  Because the Bush tax cuts automatically expire at year-end, the Democrats may act to extend all those cuts, except those for “wealthy” taxpayers.  The remaining tax cut in 2013-dollars would be larger than the original Bush tax cuts in 2001 and 2003.  This would allow Republicans to vote for the Democratic proposal, the largest tax cut in history, without violating their blood oath to Lord Grover Norquist, who used to be a comedian, by the way.  This action could be done in days, avoiding a recession.

Then, there is the optimistic scenario.  We have become so cynical that we only expect the worst.  What if Congress actually re-structured our fiscal policy; raising taxes some and cutting entitlements a lot?  Our economy would boom!  Unemployment would drop slowly at first but then improve more quickly.

Just twelve years ago, we were running budget surpluses, paying down the national debt, and employment was high.  If we have fallen so far in such a short time, we can still fight our way back.  To steal a campaign slogan . . . Yes, we can!

While I have my preferences about who should win the election, I think it is more important that the election be decisive, with one party making a clean sweep.  While I have always admired the two-party system over the parliamentary system with many parties, the two-party system is useless when there is no compromise.  While I believe a one-party system is bad for America in the long-run, what is the alternative in the short-run, except more gridlock?

I hope we don’t experience the feelings of Thelma & Louise as the canyon floor raced toward them!

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