November 28, 2012

Is It Really a Fiscal “Cliff”?

As the President and Congressional leaders deliberate over a solution to avoid the so-called “fiscal cliff,” another debate has emerged: whether the term “fiscal cliff” is even accurate.

Some journalists have begun questioning the validity of this now commonplace term in describing the looming crisis. It’s not so much the end result they dispute. Rather, they maintain that the cliff imagery distorts the actual pace at which the consequences of this crisis will take effect.

As a result, other metaphors have been put forth to supplant the cliff. Derek Thompson of the Atlantic asserts we should replace this “Ben Bernanke-ism” with the phrase “Fiscal Fast.” According to Thompson, “There is no ledge. There is no plunge. There won’t be a recession [beginning] on January 1. Many Americans won’t feel the spending cuts or even notice higher taxes for weeks.”

As an alternative, Thompson thinks the term “fast” more aptly describes how, unless a deal is reached, the resulting tax increases and federal spending cuts would gradually “starve the weak economy of much needed fuel.” In the event of a stalemate, he projects that the economy would start weakening by late-Q1 or early-Q2.

MarketWatch’s Rex Nutting agrees with Thompson insofar as the economy will lapse not suddenly, but over time. Yet Nutting believes the effects could take “many, many months” to be felt. With regard to taxes, he speculates that it might take until April 15, 2014, for most Americans to be affected by the expired Bush tax cuts. As such, he views this not as “Niagara Falls,” but rather as a “bathtub slowly filling up,” whose water will merely spill over on January 1, 2013, but not completely “flood the house.”

But Nutting cautions that the house will eventually flood, and he’s careful to remind us that “[j]ust because the impact wouldn’t be instantaneous doesn’t mean it wouldn’t be significant, if it persisted for a full year.” In particular, he cites the conclusion of both the payroll tax holiday and extended jobless benefits as immediate consequences should compromise falter.

Reporters like Thompson and Nutting have added a layer of complexity to an issue that has become sensationalized by both the government and the media at large. But however you want to describe this situation, it is no laughing matter. The U.S. may not immediately plunge into the abyss come January 1, if at all, but one shouldn’t mistake this to mean there isn’t serious work to be done. Given the political tendency to delay comprehensive problem solving, the gradual nature of this process may in fact be the most dangerous factor of all.

Sam Kerbel