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By Jeremy Glaser | 12-07-2012 12:00 PM

Tannenbaum: Don't Get Alarmed by Fiscal Cliff Headlines

Any deal to avert the fiscal cliff will modestly hit the economy, but legislators won't allow the worst-case scenario--and subsequent recession--to happen, says Northern Trust chief economist Carl Tannenbaum.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm joined today by Carl Tannenbaum. He's the chief economist at Northern Trust. We're going to look at the fiscal cliff and what impact it could have on the economy. Carl, thanks so much for joining me today.

Carl Tannenbaum: It's great to be here.

Glaser: Let's go ahead and start with the fiscal cliff. There's been a lot of political posturing on both sides of the aisle about the best way to kind of reduce these increases in taxes and then the cuts in spending. Do you think this actually is just posturing, or is there really a potential that we are going to fall over the entire cliff?

Tannenbaum: I would caution against getting overly alarmed by some of the statements that are made in the newspapers. Those are primarily stakeout positions, both for your side and for the other side. In situations like this, by far, the more productive conversations are happening behind closed doors, which is frankly where I think they belong.

Glaser: What are your expectations for what a final deal will look like?

Tannenbaum: Given the stakes involved with going over the cliff, I would find it very unusual if that were the outcome. The degree of discussion that we've had since the election has clearly exceeded what we had in the six months prior, and I think both sides want to avoid that worst-case outcome. We think that they will come to a resolution that will be pleasing to the markets. They probably won't tackle the broad issues of tax reform and entitlement reform, but they'll do enough to get the worst case off the table.

Glaser: If we have this kind of two-step solution where we handle some of the short-term issues and maybe tackle those other issues later, what does that mean for the economy, and what does it mean for growth?

Tannenbaum: We are looking at a drop from a growth rate of about 2% to a recession of 2% if we go over the cliff, and that may understate things, because it doesn't include some of the psychological things that will follow from going off the cliff, such as rating agency corrections. In addition, I would suspect that many consumers don't know just how bad their pocketbooks are going to be hit if we go off the cliff. So, that will certainly give us a trajectory of growth starting in 2013 that will be much better than the worst-case outcome.

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