Easily the most frustrating thing about being a long-term investor nowadays is how short-term focused Wall Street has become in recent years (or more accurately, Â the last two decades). Quarterly earnings reports and whether companies slightly beat or slightly missÂ estimatesÂ made by a bunch of number-crunchers in New York result in huge share priceÂ volatility. Owners of real businesses would be the first to tell you that small quarter-to-quarterlyÂ fluctuationsÂ in sales and profits are far less important than the long-term strength, viability, andÂ competitiveÂ positionÂ of their companies.
Political leaders haveÂ theÂ same problem; they are obsessed with the short termÂ becauseÂ they are up for reelection so frequently. If you listen to the media, or your elected representatives, you would think going over the fiscal cliff would be absolute catastrophe. But is that actually true? Well, it depends on whether you care about the short term or long term outlook for the finances of the United States.
The Congressional Budget Office (CBO), the non-partisan fiscal accountant for Congress, projects that the U.S. would fall into a mild recession if we went over the fiscal cliff, and that the unemployment rate would rise from 8% to 9% in 2013 as a result. In 2014, theÂ economyÂ would return to growth, much like we have today. That is the short-term impact. And yes, that is a bad outcome forÂ politiciansÂ currently holding office.
But what about the long-term view? Are there any positive effects that might make it worth it to have a short, mild economic downturn in 2013? This is a question the media and politicians rarely speak about. For instance, did you know that without any actions to blunt the impact of going over the fiscal cliff, the U.S. budget deficit ($1.1 trillion in fiscal year 2012) would fall 43% from 2012 to 2013. In 2014 it would fall another 40%. In 2015 it would fall another 45% (all figures are current CBO estimates). At that point, the U.S. federal budget would essentially be balanced. The deficit problem would vanish within three years, and that is if we doÂ absolutelyÂ nothing! Congress could actually accomplish something important by not passing Â a single piece of legislation!
One could easily argue that the best long-term outcome for the U.S.Â economyÂ would be to have a balanced budget within three years, even if it meantÂ takingÂ some short-term pain in 2013 as tax rates reset to Bill Clinton-era levels. But nobody is taking a longer term view. Everyone is acting as if they are on Wall Street and care only about theÂ immediateÂ future. There isÂ absolutelyÂ no chance that our country’s leaders do nothing and balance the budget, even though they would all agree that $1 trillion annual deficits are unsustainable and are easily the biggest problem the U.S. faces in the intermediate term.
Instead, we should expect that politicians will opt to extend most of the Bush tax cuts and postpone or eliminate most of the planned spending cuts. Such a plan would do nothing to reduce our deficits and sets us up for much bigger problems a few years down the road. What people don’t seem to understand is that the debt crisis that will arise from $1 trillion annual deficits year after year is many times worse than the relatively mild 2013 recession that inaction on the fiscal cliff would cause. Don’t believe that? Just ask Greece or Spain, whereÂ unemployment rates are over 25%.