How the Fiscal Cliff Might Be Slowing the Economy Already

| Tue Dec. 11, 2012 3:53 PM EST

Today Matt Yglesias criticizes the idea that uncertainty over the fiscal cliff is the reason big corporations are keeping their cash "on the sidelines" as they build up war chests rather than investing in business expansion:

A firm with profits must choose what to do with the money....Whenever you're making an investment decision, the fact that the future is uncertain is a real problem. But there's no particular reason to think that "uncertainty" about the future should specifically bias you in favor of low-yield highly liquid investment decisions.

Now, by contrast, something that very much could bias you in favor of low-yield highly liquid investment decisions is certainty that the inflation rate won't rise above 2 percent....Another thing that should bias you in favor of a low-yield highly liquid investment decision is skepticism about the economy's overall growth prospects. If things are going to be generally crappy, then you're not necessarily missing out on much by opting for liquidity.

That's why a real strategy for bringing corporate cash off the sidelines doesn't have anything to do with tax reform (though tax reform might be nice), it has to do with monetary policy.

In the long term, I agree. But in fairness, there's also a short term, and in the short term firms are wondering if Congress is going to throw the economy into a second recession by heading over the fiscal cliff for a protracted period. The economy is already fragile enough that companies aren't very excited about the prospects for growth, and if GDP sags further in 2013 because we can't come up with a deal, that would legitimately affect short-term decisions about business expansion.

So: a deal would be good for business. Better monetary policy would be good for business. In a reasonable world, we wouldn't be arguing about either one. That, however, is obviously not the world we live in.

Get Mother Jones by Email - Free. Like what you're reading? Get the best of MoJo three times a week.