Forget January: The 'Fiscal Cliff' Will Get Scary in February

If the fiscal cliff will have gradual effects, the "slope" could take months to hit the economy hard.

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"Fiscal cliff" is a headline-ready phrase, though many argue that it's a misnomer—that is, that tax hikes and spending cuts won't turn the country into an economically depressed wasteland immediately upon the new year.

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The idea that it's a slope—and not a cliff—signals that there will be no need to panic if Congress should need a few extra weeks in 2013 to iron out a deal. But how long do they have until the slope moves into dangerous territory?

According to one proponent of the "slope" label, the effects will be limited enough to allow for several weeks of negotiations in 2013. He points to the expiring Bush tax cuts and payroll tax cut as examples.

"You don't get your entire tax bill on January 1. It comes out of your paycheck gradually," says Chad Stone, chief economist at the Center on Budget and Policy Priorities. In other words, if Congress fails to avert fiscal cliff changes by the end of the year and taxes go up, Americans will start seeing slightly smaller paychecks for a few pay periods in 2013­—not long enough to significantly pull back consumer spending.

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Likewise, in a study Stone authored earlier this year, he points out that spending cuts would only cut spending government outlays over the course of the year and into subsequent years, not all at once, meaning a gradual effect. His ultimate point is that getting a deal that ultimately benefits the economy in the long term may be worth up to a month of debate and a little bit of short-term pain at the start of the year.

Stone adds that even if provisions like tax cuts and extended unemployment benefits were allowed to expire, Congress could retroactively put benefits and tax rates back into place shortly thereafter, at least partially negating what effects those cuts might have had.

Of course, the government could maintain the status quo briefly into 2013, which would stave off much of the economic pain...but only temporarily.

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"The economic damage from going over the cliff for a few days, or even a few weeks, would be small if (as I would anticipate) Treasury freezes withholding schedules and OMB directs government agencies not to implement the sequester until a deal is made," writes Mark Zandi, chief economist at Moody's Analytics, in an E-mail.

Still, as the CBO has predicted, going past (and staying over) the fiscal cliff would lead to a recession in 2013. And even if Congress and the White House continue to talk about a deal, the negative momentum will likely accelerate as economic effects mount and businesses lose their confidence in lawmakers to avert the cliff and also raise the debt ceiling.

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"My sense is that the economic damage would begin to mount by the end of January and be very serious by mid-February as the debt ceiling comes into play," Zandi says. "The drop-dead date for a deal to avoid hitting the ceiling and suffering a recession is the end of February."

Indeed, even if the initial cuts to government spending are modest, firms affected by those cuts, like defense contractors, could start cutting jobs in anticipation of continued belt-tightening.

While agreement on tax rates and spending levels by Dec. 31 is what many are still hoping for, there is a very real argument that we're already sliding downhill.

"I think we're already seeing it," says John Makin, a resident scholar at the American Enterprise Institute. He points out that businesses have already cut back on investment and hiring. While GDP growth last quarter came in at 2.8 percent, Makin estimates that growth in fourth-quarter output will come in at well below 2 percent.

Though the downward slope may be happening right now, Makin still sees a precipice coming at the start of 2013: "I think it's going to be prompt and painful."

"Businesses will continue to be uncertain, they'll continue not to hire," he says. "I think markets will be pretty alarmed, and that will produce quick feedback on the seriousness of going over the fiscal cliff."