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'Fiscal cliff' talks: Could they sink US job market?

The 'fiscal cliff' talks are about more than taxes. How they are resolved could have a significant impact on the US job market, experts say.

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Warning: That approaching "fiscal cliff" could affect your job, not just your taxes.

President Obama and Congress are negotiating about tax hikes and federal spending cuts that are scheduled to begin in January. Economists say that what the politicians do, or fail to do, has sizable implications for the US job market.

The twin dangers are doing nothing – meaning, going over the fiscal cliff – which could lead to a recession and unemployment rates equal to those of the depths of the Great Recession, or doing too little to address chronic deficits, which could make the unemployment rate linger at a needlessly high levels.

By contrast, a "grand bargain" that softens the blow from the fiscal cliff but also addresses the deficits, is seen by many economists as a solid path forward for job growth.

Of course, gauging the implications of the fiscal cliff for jobs and gross domestic product (GDP) is an art for economists, not a precise science. But forecasters generally agree the stakes are considerable. It's a "rock" and "hard place" dilemma.

On one hand, higher taxes aren't generally good for the economy – especially one where job growth is already fragile. And the full cliff is a lot for the economy to handle: a rise in tax rates to pre-Bush levels in all brackets, more people subject to the Alternative Minimum Tax, and an expiration of a payroll-tax holiday, among other things. On top of that, the scheduled federal spending cuts are large enough to have a potentially adverse effect on job growth all by themselves.

But on the other hand, high public debt isn't good for GDP growth either. And for decades, the US government has often run large deficits – with tax revenue averaging 18 percent of GDP since 1970, while spending has averaged about 20 percent of GDP. In the past few years, the gap between revenue and spending has grown much wider than that average.

How Congress balances these concerns could affect jobs in numerous ways.

For example, letting the tax hikes and spending cuts happen would have its benefits, according to Macroeconomic Advisers, a forecasting firm. The fiscal position of the nation would grow stronger as public debt is stabilized, and that would translate into faster GDP growth starting as early as 2014.


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