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A real cliff-hanger

Money | Automatic budget cuts and tax hikes would take the wind out of an economy that's starting to look better

“The fiscal cliff is a ticking time bomb,” said Phil Orlando, chief equity market strategist at Federated Investors. The consequences of going over the fiscal cliff “would be grave,” said 15 top executives in a letter to President Obama and to Congress on Oct. 18.

It might also be the best thing that ever happened to a lame-duck session of Congress. As Samuel Johnson once said: “When a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.”

Congress has more than a fortnight to avoid the fiscal cliff—the name Fed Chairman Ben Bernanke gave the twin effects of across-the-board budget reductions and the expiration of Bush-era tax cuts. But not much more: 16 days to be exact, though expected recesses are already causing Hill staffers to complain that the lame duck is likely to leave them with nothing but leftover Christmas turkey. 

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But there is surprising unanimity that Congress will get something done. Sen. Mark Warner, D-Va., told the Bipartisan Policy Center on Oct. 18, “This shouldn’t be this hard.” Rep. Sue Myrick, R-N.C., said, “There is no reason Congress cannot prevent the fiscal cliff.”

It won’t be easy. President Obama promised to veto any bill that extends tax cuts for top earners. Grover Norquist, president of Americans for Tax Reform, thinks he’s bluffing. “After the election, all eyes turn to 2014, where 10 or more Democratic senators are vulnerable,” Norquist said. “They don’t want to raise taxes, and Obama won’t stand alone. Obama signed the tax cut extension two years ago, and even added to them. He’ll do that again.”

Virtually everyone—Republican or Democrat—is opposed to “sequestration,” the technical term for the automatic spending cuts. Sen. Tom Coburn, R-Okla., told me that across-the-board cuts would be “folly” and not a permanent fix: “Until Congress has the guts to cut specific programs we will never get our debt under control.”

Coburn acknowledged that “new revenue” would be necessary. He denied the charge by Norquist that “new revenue” is code for a tax increase. “It means tax reform,” he said. “Lower rates and a broadening of the base. If we don’t do that, we’ll get a massive tax increase called inflation.” But neither Coburn nor Norquist believe we’ll get a systemic fix in the lame duck session.

None of this comes at a good time. “The economy looks like it wants to grow more normally again,” said Rusty Leonard of Stewardship Partners, who says going over the fiscal cliff would not be a catastrophe, but would be a serious drag on growth. “It would be a real shame to see that long-awaited impetus for more normal growth cut off at the knees by the cliff.”

Halloween jitters

Shannon Stapleton/Reuters/Landov

Wall Street calls the third, fourth, and fifth weeks after the end of each business quarter “earnings season.” It’s when thousands of publicly traded companies announce financial performance for the previous three months.

For the third quarter just ended, something unusual happened: Analysts cared less about earnings than about revenue. Revenue can give a more accurate picture of how a company is performing, because earnings can vary widely due to accounting charges and temporary cost-cutting.

The revenue picture for the third quarter was not good.  Hasbro, with brands like My Little Pony and Transformers, said sales for boys and preschool were less than projected. Caterpillar, the world’s largest construction and mining equipment company, cut its profit and revenue predictions for the year, blaming weakness in the global economy.  

The result was an October that gave back September gains. Between Oct. 5, just before earnings season began, and Oct. 23, with earnings season winding down, the Dow fell more than 500 points and left traders with a dose of Halloween jitters most think will last until the end of the year. —W.C.S.

Warren Cole Smith
Warren Cole Smith

Warren, who lives in Charlotte, N.C., is vice president of WORLD News Group and the host of the radio program Listening In. Follow Warren on Twitter @WarrenColeSmith.

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