Technically, we won’t hit the fiscal cliff — Washington’s preferred term for the near-simultaneous triggering of more than $600 billion tax increases and spending cuts, as well as the predicted point at which we once again hit the debt ceiling — until after the election. But the effects could be felt long before.
The 2011 debt ceiling debate provides an illustrative example. Early in the year, the recovery seemed to be proceeding smoothly. In February, the economy added 220,000 jobs. In March, it added 246,000 jobs. And in April, 251,000 jobs. But as summer approached, and as markets shuddered over the Republican threat to breach the debt ceiling, the economy sputtered. Between May and August, the nation never added more than 100,000 jobs a month. And then, in September, the month after the debt ceiling was resolved, the economy sped back up and added more than 200,000 jobs.
Payrolls weren’t the only evidence that the debt ceiling fight interrupted the recovery. “High-frequency data on consumer confidence from the research company Gallup, based on surveys of 500 Americans daily, provide a good picture of the debt-ceiling debate’s impact,” observed economists Betsey Stevenson and Justin Wolfers in a column for Bloomberg View. “Confidence began falling right around May 11, when [House Speaker John] Boehner first announced he would not support increasing the debt limit. It went into freefall as the political stalemate worsened through July. Over the entire episode, confidence declined more than it did following the collapse of Lehman Brothers Holdings Inc. in 2008. After July 31, when the deal to break the impasse was announced, consumer confidence stabilized and began a long, slow climb that brought it back to its starting point almost a year later.”
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