The Truth Behind the Fiscal Cliff Hysteria

What will happen if we go over the so-called "fiscal cliff"?


David Brodwin is a cofounder and board member of American Sustainable Business Council. Follow him on Twitter at @davidbrodwin.

The so-called “fiscal cliff” is less than 10 business days away, and it’s got everyone scared. Will President Obama and the House of Representatives make a deal before we go over the edge? Will the economy plunge into the abyss if a deal is not reached? The answer is no, and no.

The phrase “fiscal cliff” is designed to mislead, confuse, and frighten. The phrase evokes a fatal and unstoppable fall.  It is designed to make us afraid. But the image of a cliff is not an accurate description of the underlying economics. "The cliff" is just a metaphor, a shorthand phrase to describe a complex issue.  We need to look beyond the metaphor to project what will actually happen if a deal is not reached by year end. We need to understand who is promoting the image of the cliff, and why it is in their interest to do so.

More like a beach than a cliff.

Cliffs are steep. Once you go over a cliff, there’s no stopping yourself until you hit the bottom. But a beach is gradual. When you walk down the beach towards the water, at some point your feet will get wet. If you keep going, you’ll ultimately be in water over your head. But we don’t fear the beach: We all know that at any point it’s possible to simply turn around and walk out of the surf.

Our economic situation is more of a beach than a cliff. Many forces exist to force our politicians to turn around before the water gets much more than ankle deep. Suppose December 31 comes and goes without a deal. Taxes will go up on January 2 for both the middle class and the wealthy. On January 3, President Obama‘s allies in Congress will propose a bill to cut taxes for the middle class. Republicans won’t dare oppose a bill that cuts taxes, and they will be forced to go along. One way or another, by early January the middle class will have its tax cut and middle class people will go on spending and stimulating the economy.  The wealthy will be stuck with a small increase in taxes, but they’ll continue to spend too, because they can afford to spend regardless of the tax rate. This will help sustain consumer demand.

The fiscal beach involves more than taxes; it also involves the sequestration of $110 billion in government spending, half military and half discretionary.  Fortunately for economic growth, the major prepaid benefit programs of Social Security and Medicare are exempt from sequestration, so the failure to come to deal by year end leaves these programs intact. And that’s good news in the near term. Cutting these programs would grievously depress consumer demand, hurting the economy as consumers spend less and save more to cover the risk of retirement and medical care.

Sequestration threatens to cut defense spending, and these cuts would hurt, if they actually go into effect. In those parts of the country where the economy depends on military bases and defense contractors, the pain would be sharply felt.  But the cuts are not that big, about 8 percent of the total defense budget. Arguably the cuts are long overdue, since the United States spends nearly eight times as much on defense as China, the country with the second largest military in the world. However, the defense industry has, since the 1950s, been remarkably adept at winning bipartisan support for ever-increasing defense budgets by spreading out the pork over all 50 states. It’s likely that a bill reinstating current levels of defense spending (retroactively) would get rammed through Congress quickly, with broad bipartisan support.

[See a collection of political cartoons on the fiscal cliff.]

How "the cliff" language is intended to scare us—and why.

Those who want to preserve unsustainably low tax rates at the top end want us to be afraid. For that reason, they promote the idea of "the cliff." Their strategy has two parts: First, they want us to think that "the cliff" will kill the American economy and must be avoided at all costs. Second, they want us to believe that congressional Republicans are rabidly opposed to tax hikes in any form, and won’t compromise under any circumstances. Meanwhile one of them (House Speaker John Boehner) positions himself as the Sane Guy, trying to rein in his colleagues. It’s the classic “good cop / bad cop” negotiating strategy.   

The tax foes promote a point of view that is designed to force the other side to yield. Their reasoning goes like this: If Americans believe we must avoid "the cliff" at all costs, and if we believe that tax foes are incapable of compromise, then the only possible answer is to slash all government programs. That’s what they want.

[See a collection of political cartoons on the budget and deficit.]

Smart politicians won’t fall for this. They realize that they engaged in a game of chicken with opponents who are pretending to be crazy. It’s reminiscent of the scene in Blazing Saddles where Bart, the African-American Sheriff (played by Cleavon Little) puts a gun to his own head and says, “Next man makes a move, the nigga gets it!” In this classic film, the bluff works because the townspeople think Bart is crazy enough to pull the trigger. In our modern political version of Blazing Saddles, Tea Partyers play the role of Bart. Some Democrats and most media play the role of the gullible townfolk. Will they fall for the ruse this time?

How does this end?

In a high-stakes game of chicken, neither side can show flexibility. Obama holds the stronger position in terms of public opinion and the underlying economic principles. But he does not hold a controlling position. Both sides must curry favor with their political base. If either side makes concessions before the last possible moment, they will be accused of selling out their supporters. And so Obama and Boehner must pummel each other all the way down the beach and into the ocean. Then, with cold water stinging their ankles, they will turn around and come back up the beach. That is how America will survive the cliff that isn’t a cliff.

  • See a collection of political cartoons on the economy.
  • Chad Stone: The Debt Ceiling, Not the Fiscal Cliff, Is the Danger to the Economy
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