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It's widely accepted at this point that a protracted fall over the fiscal cliff will send the country plunging back into recession. But what if, as is far more likely, lawmakers blow the deadline by just a few weeks? Conventional wisdom suggests it wouldn't be so bad, that the economy could endure the short-term pain. But don't count on it, writes Neil Irwin at the Wonkblog of the Washington Post. It's not enough to crunch specific numbers, you have to factor in the larger psychological effect.
"Markets don’t like risk," he writes. "And for the world’s largest economy to adopt a yo-yo approach to fiscal policy—steep tax increases and spending cuts one month, a reversal the next—would be an extra layer of risk for already jittery markets." The stock market would likely fall, while businesses and households retrench. Maybe the business cycle could bounce back quickly after a few weeks, but "losing this gamble would be very costly to everybody," says JP Morgan's chief economist. Read the full post here.
