In less than five months the U.S. economy will face one of its toughest tests yet: a massive tax increase coupled with big spending cuts if Congress fails to act. This so-called fiscal cliff involves almost $3 trillion in tax increases and almost $1 trillion in spending cuts over the next 10 years beginning in 2013.
The Congressional Budget Office forecasts another recession if Congress fails to act.
Steven Rattner, a former Treasury official in the Obama White House and now chairman of Willett Advisers, told The Daily Ticker a major market meltdown would follow if the economy goes over that cliff.
He likened the situation to a car going 80-miles-an-hour in a 40-mile-per-hour zone. "If you slam on the breaks you go through the windshield. That's effectively what would happen to the economy not just because of all the changes that would occur in the federal budget but also because markets would be destabilized," Rattner says. "You would have a major market meltdown."
He prescribes a moderate, gradual deceleration instead. But is Congress capable of doing that -- or anything at all?
Rattner says this Congress has passed the fewest laws than any other Congress in modern history—about two-thirds less than the "do-nothing" Congress during Harry Truman's presidency.
Rattner doesn't expect any Congressional action between now and early next year, when the tax cuts and spending cuts begin to take effect. He says the market will be okay with that.
After the election, however, expectations change.
"New congress, new president. Give them six months to work this out," Rattner says.
He expects there will be a compromise.
"No one party is going to control two houses of Congress plus the White House in sufficient numbers to do what they want to do."