We have all heard our upcoming congressional budget battle referred to
as a fiscal cliff, but some have called it either a “fiscal curb” or a “fiscal slope ” instead. What a difference a choice of words can make. A slope sounds much less scary than a cliff, doesn’t it? Couldn’t we roll down a slope and not get hurt?
Simply put, we are facing in January the expiration of some major tax cuts if they are not renewed along with automatic across-the-board spending cuts in the federal budget.
If congress cannot come up with some sort of compromise between now and January, all of these tax breaks and spending cuts automatically go into effect, which might seem a dream come true to super deficit hawks. Except for one thing: Most economists believe such a sharp reduction in tax breaks and government spending would throw our economy in reverse. i. e. back into recession.
The latter spending cuts are the result of a congressional agreement made in 2011, so that Republicans would allow for the debt ceiling to be raised (in pre-Tea Party days, largely a formality for decades (*1). These automatic cuts were put into place to supposedly force congress to work together to come up with sensible reductions before this January deadline, but since they failed to do that, the cuts will simply be made across-the-board (though with some exceptions). This is commonly described as cutting the budget with a hatchet instead of a scalpel. Another rhetorical flourish.
All that happening at once would be a fiscal cliff, but not likely to play out that way given the well-proven ability of congress to make deals lacking immediate consequences. Most likely they will come up with some mini-partial deal, while giving themselves another six months or so to work out the details (of which in truth there would be many if tax loopholes, let’s say, were actually going to be broached).
And even if congress doesn’t get an agreement by January, they can make an agreement later and make it retroactive, which might initiate a slip off of the fiscal curb in the interim, rumblings in the stock market, and an increase in overall national anxiety, but we wouldn’t be falling off a fiscal cliff.
Also, Treasury Secretary Geithner could freeze paycheck-withholdings — the government’s cut out of each paycheck — even if tax rates rise at the end of the year. To summarize a report from Bloomberg News, “By letting taxpayers keep about $10 billion per pay period, that would single-handedly curb about half of the economic effect of the fiscal cliff and help the country avoid a recession.”
People who, in contrast to me, actually understand these matters, undoubtedly could suggest other factors that will more or less soften the landing, implying that we won’t fall off a fiscal cliff unless most of the key players become brain dead simultaneously. My guess is the “cliff” will be ground down to a slope over the next few months, albeit a bumpy one with some potholes added by global economic events.
If I’m right, that’s the good news. The bad news is the huge iceberg of debt will remain dead ahead. At best, this will only move the steering wheel slightly.
Also, sometimes there are unintended consequences. Anyone who saw the movie Rebel Without A Cause (1955) or just know about it through the legend of James Dean, will recall the “chickie run” in which a teenaged Dean and a local hood test their courage by driving jalopies full speed towards a cliff to see who will jump first.
Technically the hood won because he never jumped. His jacket got caught on a door handle. Oops.
Let’s just hope the budget negotiations don’t get caught on a door handle.
(*1) Why do they have a debt ceiling? The U. S. government since its inception has operated with varying degrees of debt. The debt ceiling might be thought of as a periodic pause for thought as to how much debt government is willing to tolerate at a given time. Raising the debt limit had become almost automatic prior to 2011, but Republicans made it an issue then. More on that battle can be found here.