Chris Van Hollen says it’s hard to be hopeful about seeing issues resolved soon. 'Fiscal cliff' worries economists

Democrats and Republicans are trying to stir up votes for November by locking horns over the coming fiscal cliff, but they’re stirring up just as much anxiety among economists who fear that the rhetoric upsets consumer confidence and squashes the stock market.

“This is a very high-stakes game of messaging, seemingly overlooking some very negative economic implications in the quest for good sound bites,” said Greg Valliere, chief political strategist for the Potomac Research Group.


Without some kind of agreement on the expiring tax breaks and expected spending cuts, the Congressional Budget Office has predicted the United States would plunge back into a recession at the start of 2013. But if the situation looks dire — with a fiscal cliff at its worst totaling $665 billion, or more than 4 percent of the economy — the pullback can start immediately. Some economists say it’s already begun.

House Speaker John Boehner (R-Ohio) plans to hold largely symbolic votes this fall on extending all of the tax breaks first passed under President George W. Bush.

“I would far prefer to see these issues resolved sooner rather than later, but it’s hard to be hopeful about that in light of comments by Speaker Boehner,” said Rep. Chris Van Hollen (D-Md.), ranking member of the House Budget Committee. “Instead of talking about coming together and finding common ground, he is laying down reckless economic ultimatums.”

A recent estimate by the bank HSBC found that extending the cuts for all but the wealthiest Americans would lower the cliff by $68 billion, but that number depends on what the Democrats counter with.

Last week, House Minority Leader Nancy Pelosi broke with President Barack Obama and decided to fight for higher tax rates being restored for Americans earning more than $1 million a year. Obama had called for an increase for those making more than $250,000, but there was consensus within the caucus only on the higher figure, Van Hollen said.

Republicans on the Hill interpreted the move as a sign of disarray within the Democratic Party that gives them an edge.

“They recognize calling for tax hikes at $250,000 in a weak economy is a bad idea — both economically and politically,” a Republican congressional aide said. “And now the president seems to have lost his left flank in the battle.”

Stock markets panicked last summer as hostile talks between the White House and congressional Republicans pushed the federal government toward the brink of default. The Dow plunged more than 15 percent between late July and the start of October, a downturn that could easily be repeated this summer if the situation looks desperate.

Ethan Harris, North American economist for Bank of America Merrill Lynch, told clients in a note that the markets are in the “denial” stage of grief, with anger, bargaining, depression and acceptance still to come.

But Jerry Webman, chief economist at Oppenheimer Funds, said the stock market has already responded to the approaching cliff by selling off.

“We don’t know how to price the risk of the fiscal cliff, particularly after last year,” Webman said. “And if last year they were playing with matches, now they’re playing with flamethrowers.”

— Josh Boak

Wall Street POLITICO is a weekly column looking at issues that drive business.