1:54 PM Eastern - Monday, December 17, 2012

Debunking Wall Street's false claims about going over the "fiscal cliff" #default


Wall Street is pushing Congress to enact a large deficit-reduction deal that takes a hatchet to retirement programs and spending that helps the middle class in order to boost their own profits and pay less in taxes. Wall Street advocates have concocted a series of arguments aimed at scaring policymakers and the public into accepting a bad budget deal.

Here are a few of the more common fallacies Wall Street and its advocates in Washington are promoting.

MYTH: There will be massive layoffs if we go over the cliff.

REALITY: This is not true. The economy will not immediately plunge into a recession if there is not a budget agreement by January 1.Going over the fiscal cliff could be perilous, but no deal is preferable to a bad one that cuts Medicare, Medicaid and Social Security. In January the Senate would immediately push to revive the lower tax rates for everyone but the top 2 percent.

MYTH: In reaction to the uncertainty, financial markets will go into a tailspin if there's no deal on January 1.

REALITY: The daily fluctuations of the stock market are not very important in the decision-making processes of most companies in the real economy. For example, when the stock market fell over 500 points in October 1987, the economy grew at a 7% annual rate the following quarter. One thing does not necessarily lead to another.

MYTH: Credit rating agencies will downgrade U.S. debt if we go over the cliff or don't reach a very large budget deficit deal.

REALITY: It is highly unlikely that going over the cliff will trigger a downgrade. If the credit rating agencies are concerned about large deficits, it would be odd to see a downgrade due to actions that attempt to reduce the deficit too much too quickly.

But the more important point to note is that we should not be too concerned about the credit rating agencies. They have little, if any, credibility. Their ratings were completely wrong in the run up to the economic crash. Then, last year when Standard and Poor's downgraded U.S. debt it had virtually no long term effect on financial markets. The day after the downgrade markets fell 600 points, yet a year later, interest rates had fallen and the Dow was up over 1,600 points.

MYTH: If Republicans get the big long-term deficit reduction deal they're pushing for, the markets will be unleashed and result in massive job-creating investments. Problem solved!

REALITY: Pinocchio's nose just doubled in size. Our long-term fiscal deficits are not, I repeat, NOT preventing corporations from creating jobs.

In fact, quite the opposite is true. Deep spending cuts will slow economic growth resulting in reduced corporate profitability, increased layoffs, and reduction in job-creating investments. Indeed, slow economic growth and weak consumer demand is why corporations are choosing to sit on their enormous stockpiles of cash rather using it to make job-creating investments.

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