Don’t Fall for the “Fiscal Cliff” Rhetoric

Katja Kleine, RESULTS U.S. Poverty Intern
June 12, 2012

The hype around the economy in general has been intense for the past couple years, but  recent warnings by Ben Bernanke and the Congressional Budget Office about an impending "fiscal cliff" have been misinterpreted and thus fueled a sense of economic panic.

Under the current law, the Bush tax cuts, recent payroll tax cut, and emergency unemployment benefits will expire at the end of this year. Simultaneously, automatic and significant spending cuts from the Budget Control Act will go into effect on January 1. The fear is that this combination and tax increases and spending cuts will immediately push the U.S. economy back into a recession, negating any progress over the last few years. Lawmakers are using these fears to justify making bad policy decisions, such as extending the Bush tax cuts for the wealthy.

But don’t let the "fiscal cliff" hype fool you.

First, the term "fiscal cliff" itself paints a false picture, evoking visions of the U.S. economy plunging back into recession as soon as the ball drops on New Year's Eve. That will not happen. This so-called "cliff" is actually more of a "fiscal slope," as described by the Center on Budget and Policies Priorities (CBPP). Assuming that all of these events take place as planned, the income and estate tax increases won't have a serious immediate impact. They won't be fully felt until people begin filing their taxes, thus providing a window of time after January to deal with the problem. Payroll tax increases and the expiration of emergency unemployment benefits will have a larger effect immediately because they will create actual changes in incomes starting January 1, 2013. However, except for low-income Americans, payroll taxes and unemployment benefits make up a smaller portion of taxes and are thus not going to produce economic Armageddon. In addition, the automatic “sequestration” cuts will take place over the entire year and thus will not be fully felt in January, again providing a window of opportunity to fix the problem.

There is no doubt that simply letting everything expire will have a negative effect on economic growth. If nothing is done in the first quarter of 2013, the risk of recession is very real. But no one expects Congress to sit idly by and do nothing. The likelihood of all the Bush tax cuts permanently expiring is almost nil. Barring some unforeseen event, Congress will extend some or all of the Bush tax cuts in the lame duck session or in early January, as both parties agree that some of the tax cuts should be extended. Similarly, most analysts expect Congress to take action on the sequester cuts, as many in both parties don’t want to see them take effect either. Already, Senate Finance Committee Chairman Max Baucus is working on tax reform proposal to be voted on after the election.

Knowing this, we can help our policymakers and representatives make informed and conscious decisions. Ideally, policymakers will come to an economically or ethically safe decision before the deadline. What we cannot do is let lawmakers use unsubstantiated scare tactics  justify making bad policy, which would do far more damage to the economy in the long run. In other words, we can"t sacrifice long-term stability for short-term theatrics. When you hear this fiscal cliff rhetoric being used, speak up and use the truth to set things straight.