While the U.S. Congress views the convergence of more than $600 billion in tax increases and spending cuts set for Jan. 1 as a “fiscal cliff,” the metaphor misses the economic reality of what could follow.
The image popularized by Federal Reserve Chairman Ben S. Bernanke describes an immediate plunge, not the series of compounding events that could occur if congressional leaders and the president fail to compromise.
“Cliff conjures up Wile E. Coyote, and January comes, and all of a sudden you plunge into a deep recession inevitably and it all happens fast,” said Chad Stone, chief economist at the Center on Budget and Policy Priorities in Washington. “That’s not the way things would unfurl.” He said he prefers the term “fiscal slope” to describe how the effects would accumulate gradually during 2013.
Congress created the conjoined deadlines on tax and spending policy as a way to prod itself to resolve long-running disputes on fiscal issues. The cliff metaphor has reinforced the need for action, shaping the debate for more than nine months and increasing pressure for Congress to avert at least some of the tax-and-spending changes.
While negotiations have stalled over President Barack Obama’s demand for higher tax rates for top earners and congressional Republicans’ insistence on structural changes to entitlement spending, a Republican aide says those talks will narrow to conversations between Obama and House Speaker John Boehner. Failure to reach an agreement by year’s end could mean, in keeping with the metaphor, going over the cliff.
The Congressional Budget Office estimates that the U.S. would probably enter a recession in the first half of 2013 if Congress doesn’t act to avoid the tax increases and spending cuts. The unemployment rate would climb to 9.1 percent in the fourth quarter of 2013 from 7.7 percent in November 2012, CBO projects.
Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC, said critics of the cliff image understate the potential for business investment to decline and for financial markets to react negatively to legislative gridlock.
“The folks who argue that it’s a fiscal slope are really ignoring the psychological impact that it would have on the business community,” Dutta said. “We face a cliff in the sense that this would be a notorious political failure if Congress failed to avert a recession, because that’s effectively what the government is threatening right now.”