Policymakers are currently focused what has come to be known as the fiscal cliff. This fiscal cliff was created by the Budget Control Act of 2011 that triggers spending cuts and tax increases in January 2013 that is likely to set the economy into a tailspin. The problem is that the cliff was there long before the Budget Control Act; all the act did was to say, “If you don’t at least start edging your way down the cliff by December 2012, you’ve going to have to do so beginning in 2013. That part of the story—that the cliff cannot be avoided—has been lost in the fiscal cliff metaphor.
Political posturing, negotiations, recommendations and commentary make it sound as if Congress can avoid the fiscal cliff just by agreeing on some relatively minor spending cuts and tax increases that will replace the relatively small tax increases and spending cuts that have become known as the fiscal cliff. That’s not true. The cliff is unavoidable, and it is steeper than policy makers have been willing to admit. And to get down it, and eventually we must if we are to get the economy back on a sound fiscal and monetary ground, we will have to increase taxes and cut spending much more than the political discussion to date would have you believe. The reason is not the cliffs we currently see. The problem is that there are additional hidden cliffs embedded in existing demography and government accounting practices. So, the real issue is how and when to jump off the cliff, not whether we have to jump.
What policy makers and economists are not telling the public is that whenever and however we jump, there is going to be a lot of pain. If we jump quickly, the economy will fall into a deep recession, lots of people will be hurt. If we jump slowly, the economy will remain mired in its current structural stagnation, with slow growth and high unemployment continuing for decades or more. The most an agreement on the fiscal cliff can do is to spread out that pain, and perhaps cushion the fall somewhat.
What’s keeping us from a recession in the near term is unsustainable fiscal and monetary stimulus—the equivalent to an economic oxycodone—a narcotic to avoid pain. The problem with the narcotic of government stimulus is that, as is true with any “fix”, for the economy to gets off the stimulus fix, it will have to go through withdrawal. We can postpone it, but eventually, withdrawal won’t be a choice. The increasing government debt, and the coming due of government obligations that are aren’t even included in the current measures of the government debt, will force monetary and fiscal authorities to reverse course. As Stein’s Law tells us, “If something cannot go on forever, it will stop.”
The policy debate should not be about whether the United States can avoid the fiscal cliff. It’s part of the landscape. The question they should be debating is, “How and when should we jump off?” Do we want to go cold turkey—and take the deep recession that will accompany sudden monetary and fiscal withdrawal, in the hope of a faster recovery? Or do we want to withdraw more slowly, extending the fall off the cliff for another decade. Whichever we choose, the pain is going to be a lot greater than politicians on either side of the aisle are preparing people to endure.
First Published : November 30, 2012