The Fiscal Cliff Is Not as Scary as You Think (but a Bad Deal Should Terrify You)

More

Some people complain about "The Media," in the singular, as if it's The Borg taking directions from one mysterious and anonymous force. But they'd struggle to explain the current fiscal cliff debate, which has revealed two very distinct and very opposed financial "media."

If you watched various shows on Fox Business, CNBC, and even MSNBC, you could come away with the impression that the "fiscal cliff" is ready to destroy us, and if Congress doesn't come to a solution by Christmas, the financial consequences will be cataclysmic enough to make the Mayans' prediction look quaint.

Yet, if you surround yourself with economic blogs and online commentary (and certain TV shows) you can come away with an opposite impression: That the fiscal cliff is not a cliff, but a slope; not a cataclysm, but a manageable problem; and that it won't destroy the dollar or push up interest rates, but rather strengthen the dollar, do nothing to interest rates, and possibly have very little effect at all, even if it extends into January, if we resolve it responsibly.

But try telling that to CNBC, which launched its own advocacy movement, "Rise Above," to bill the fiscal cliff as "the most important issue of this time." Some CNBC hosts have relentlessly lobbied Washington to reach a solution -- particularly one that avoids raising taxes, as host Joe Kernens said -- in fear that the markets will crater if we go into 2013 without a deal, with the economy following swiftly behind.

The future is hard to predict. But the evidence suggests that the economy is not going to suddenly collapse next year, even if there is no deal, because tax hikes and spending cuts won't come down like a guillotine (or a cliff) in January.

Screen Shot 2012-11-08 at 4.39.27 PM.png


TAXES. Here's a handy pie chart showing the breakdown of tax increases (in BLUE) versus spending cuts (in RED) from the fiscal cliff. The vast majority of it is taxes. The typical family's income could decline by as much as 4% in 2013 if Congress does nothing.

But Congress won't do nothing. It will do something. And taxes won't necessarily go up starting January 1. As Reuters reports, "the Treasury Department and the Internal Revenue Service have flexibility as to when to implement new, higher taxes. And even if higher withholding rates do take effect in January, they could be retroactively reversed later in the year."

SPENDING. The Budget Control Act calls for $65 billion in spending cuts by the end of next year. But it doesn't say anything about one cent of cuts by the end of January. If we go into 2013 with a deal in the works, but not yet on the president's desk, it's possible that no cuts will happen, no contracts will be canceled, no workers will be fired, and practically nothing will change.

A bad deal could do more damage than the looming presence of a cliff. If both sides agree to let the payroll tax cuts expire, that's a $160 billion hit focused on families in the bottom 80%. If Republicans and Democrats agree on tax increases and spending cuts that shrink the deficit too quickly, it will surely steal from 2013 growth. If Democrats give away a higher Social Security retirement age for practically no revenue, it will mean balancing the budget on the backs of the future's middle-class retirees. This is precisely why you hear so many people in the second "media" above caution that getting the right deal, at some time in the near future, is more important that getting any deal, at some time in the next month.

Jump to comments
Presented by

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

Get Today's Top Stories in Your Inbox (preview)

Sad Desk Lunch: Is This How You Want to Die?

How to avoid working through lunch, and diseases related to social isolation.


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Where Time Comes From

The clocks that coordinate your cellphone, GPS, and more

Video

Computer Vision Syndrome and You

Save your eyes. Take breaks.

Video

What Happens in 60 Seconds

Quantifying human activity around the world

Writers

Up
Down

More in Business

Just In