The World Won’t End — Even If America Goes Over That “Cliff”
If you aren’t sufficiently gullible to believe that the world will end on December 21, 2012 — the due date of that “Mayan calendar” hoax popularized by charlatans — then neither should you believe that the world will end 10 days later on December 31. Not even if America runs right up to the edge of the “fiscal cliff” and drops over.
Every day now, some authoritative-sounding voice warns of the dire impact everyone will suffer if and when the year concludes without a new fiscal agreement between the president and Congress that will prevent automatic tax increases and spending cuts from taking effect on January 1, 2013. The expiration of the Bush tax cuts (which were largely responsible for creating the current problem) plus the automatic reduction of defense and other discretionary spending will supposedly drive the US — maybe the world — into deep recession or worse. The credibility of the United States government will be permanently ruined.
This growing hysteria is part of a broader propaganda effort to stoke fear of deficits, in the hope that voters can be stampeded into accepting cuts in popular social programs like Medicare and Social Security (or at least throw the poor and elderly overboard with cuts to Medicaid). Repeatedly we have been told that America is stumbling rapidly toward the same fate as Greece or Spain or Italy, unless they immediately accept the same austerity budgets that have done so much damage to those countries.
The truth about both the so-called cliff and the deficit itself is very different than the scare campaign suggests, however. Yes, it would be better if Congress and the president came to a reasonable agreement on taxes and spending before the automatic changes go into effect on January 1. Yes, the eventual consequences could be severe. And yes, we eventually need to change the projected path of federal spending to insure a sustainable future. But no, a giant economic asteroid will not obliterate us if the president and Congress fail to make a deal within the next five weeks.
The immediate economic impact of an increase in tax rates and a cut in spending is likely to be “modest,” according to the Center on Budget and Policy Priorities, whose analyst Chad Stone refers to a fiscal “slope” rather than a “cliff”:
If current law initially takes effect — causing various income and payroll tax cuts to expire on January 1, emergency unemployment insurance (UI) to expire while joblessness remains very high, and across-the-board spending cuts to kick in on top of the discretionary cuts that the 2011 Budget Control Act caps mandate — the economy will indeed start down a slope that could ultimately lead to a recession in 2013. But that’s a far cry from the economy falling off a cliff and plunging immediately into recession.
In fact, the slope would likely be relatively modest at first (and then much steeper if 2013 unfolds without a fiscal resolution). This means that if there is no agreement by January 1, policymakers will still have some (although limited) time to take steps to avoid the serious adverse economic consequences that the Congressional Budget Office (CBO) outlines in its recent analysis of what will happen if the expiring tax cuts and new spending cuts take effect on a permanent basis. That is, they will have some time to work out the needed compromises and craft a budget and economic package that can support the recovery over the next few years while putting in place a balanced package of spending and revenue measures that will stabilize deficits and debt (relative to the size of the economy) over the coming decade.
Americans should likewise resist panic, says the CBPP, if the president and Congress don’t instantly reduce the deficit by $4 trillion — a somewhat arbitrary number that may simply be too high to achieve in the short term. Given the reductions already achieved by President Obama, a sustainable budget that doesn’t increase the deficit faster than the economy grows could be attained by $2 trillion in additional cuts over the next decade. That would create space to assure fiscal balance when the economy is growing again and when health care costs that will drive future deficits may be easier to control. And a more gradual tighening makes far more sense when the economy is still underperforming on employment.
So the president, Democrats in Congress, and their supporters should reject bad compromises that would decimate important programs or allow the rich to continue avoiding their fair burden. If there is no deal because Republicans refused to raise taxes on the wealthy, they will rightly suffer the blame — and there will be time for public anger to push them toward reason.