NEW YORK ( TheStreet) -- President Obama and Congressional Republicans are engaging in dangerous brinksmanship. Putting off addressing the fiscal cliff until after the election risks a second Great Depression.
Without a compromise by January, $400 billion in mandatory spending cuts and more than $100 billion in tax increases immediately go into effect. With GDP only growing $300 billion annually, such a shock would thrust the economy into prolonged contraction.
With the federal deficit already exceeding $1 trillion, additional stimulus spending significant enough to rescue the economy is unlikely, and interest rates are already at record lows. These leave policymakers with few tools once things start unraveling. However, President Obama has given Republicans few political choices but to roll the dice.
Facing re-election, he promises to veto any extension of Bush-era tax cuts for middle-income Americans if Congress does not raise tax rates on upper-income families. He won't entertain meaningful cuts in entitlement spending or health care.Even if Mr. Obama wins, he likely will be saddled with a Republican House. Armed with a mandate, he will get higher taxes on upper income families. However, he has made commitments to expand the U.S. naval resources in the Persian Gulf and Asia to counter Iran and China. He can't finance those without giving Republicans some of the entitlement reforms they want but can't get now. For the economy, one of three outcomes is likely. President Obama wins but doesn't reach a deal with Republicans before February or March. Mass layoffs begin late this fall, especially in the defense sector, and the economy stumbles badly. Mr. Obama wins and reaches a compromise with Republicans in Congress by late December. Taxes go up, and overall spending is cut, but not as much as current legislation requires. The combination still derails the fragile recovery. Governor Romney wins and implements a pro-growth agenda, but the current situation is too urgent to wait for actions that won't take effect until at least next spring and summer. Businesses are already curtailing investments in machinery and information technology as a hedge against a contracting economy in 2013, and consumers are spending less. Retail sales fell in each of the last three months.