The Bright Side of Falling Off the Fiscal Cliff

Forget all the hysteria on TV -- going over the cliff would only bring on a brief, mild recession before the country returned to growth. In the meantime, it could set us up for a brighter economic future.


As 2012 sputters to a close, it wraps up with a yawning gap between widespread economic pessimism and the actual state of economic affairs.

Though consumer sentiment rebounded in the fall, it fell in December, amid relentless coverage of the impending fiscal cliff. Holiday spending was muted. Businesses, meanwhile, cite the unresolved negotiations in Washington as evidence of continued uncertainty and many have put new spending, hiring, or investment on hold. The media counts the days (and on some cable news channels, the minutes and the seconds) till we descend the fiscal cliff, adding to the general agitation.

Yet, every indicator of American economic activity has been strengthening. Stocks are up between 8 percent and 14 percent in 2012, depending on the index. Gross domestic product is increasing more than 2 percent a year; unemployment has fallen below 8 percent; wages are steady even as inflation is close to non-existent. Energy prices have declined, and home prices have increased. Debt burdens for American households are now at the lowest level in 29 years, giving the vast majority of consumers more flexibility in their spending.

None of this, however, is evident if you listen to rhetoric in Washington, commentary on Wall Street and buzz in the news. Prognostications instead have us going off the fiscal cliff (completely or at best partly) and then, according to the Congressional Budget Office, descending into recession, higher unemployment and assorted other problems.

Something has to give. Either the powerful trends of forward movement will be dashed to bits at the bottom of the fiscal cliff or the consequences of that plunge will be far less dramatic than feared. You can make a case for either -- but most are making the case for the negative.

That may come to pass, but it's less likely than supposed.

First, even the CBO isn't making an unequivocally negative case. If the government does nothing for the entirety of 2013 to offset the tax hikes and spending cuts mandated as of January 1, the CBO forecasts a recession of more than 1 percent in the first half of 2013 -- but then 2 percent economic growth in the second half, accelerating even more in 2014. Over a decade, these measures will likely reduce deficits by as much as $10 trillion. We are so focused on the short-term pain of this cliff that we haven't taken sufficient measure of the long-term benefits.

No, the indiscriminate cuts are not the best way to balance the budget. Unemployment benefits are not extended. So the tens of millions of people already stretched to the edge will see moderate tax increases. Needed government programs will also be trimmed.

Yet, as dysfunctional as Washington is, the chance of nothing being done to address this over the next months is close to zero. No Congress would likely welcome the reality of 12 million people with no income.

But much of the rest -- including reducing unnecessary defense spending and raising taxes on the wealthy -- are measures that need enacting and now look likely to be.

So here we have what is labeled a worst-case scenario -- going over the cliff -- that yields long-term advantages, with its worst features easily remedied.

And the larger backdrop? The U.S. economic system is in the middle of structural shift. Tens of millions of workers, mainly men, have lost competitive advantage to less-well-paid workers around the globe and also to robotics and information technology that has made many 20th -century jobs unnecessary.

Whether the United States emerges on the other side of that shift as a prosperous, service-oriented, entrepreneurial, innovative society is the question of our time.

The pessimistic view says that without a currency based on something tangible, such as gold, and an economy based on something tangible, like manufacturing, the future is bleak. But this assumes that the only viable system is the one we had and that no possible alternatives could evolve.

Those views also put government in a central position as economic steward, which again was the case in the 20th century. Today's federal government is hardly a hotbed of innovation and may matter less to our collective future than we assume.

The fiscal cliff, rather than dooming us, may reveal that government as an economic actor is less potent than all sides of the political spectrum assume. The economic future of America lies less with what Washington does or doesn't do and more with what tens of millions of Americans, especially those under age 30, make of the future. With high education and literacy levels, as well as access to cutting-edge technology, the preponderance of these millions of Americans look to be crafting a set of new economies based on social media and software applications that are changing the way business is done and commerce is transacted.

Globally, Europe remains mired in what looks to be a multi-year contraction and stagnation. But it is no longer a tinderbox about to ignite a global meltdown. China has again confounded expectations by having neither a hard economic landing nor an especially notable soft one, and while its growth rate has slowed, it remains an economic juggernaut about to enter a prolonged phase of consumer-driven domestic growth. Sub-Saharan Africa has multiple pockets of strength, even as South Africa faces challenges. And Latin America continues to be a series of remarkable successes - from Brazil's steady evolution to Chile and Peru's resource-fueled expansion.

Perhaps the most surprising Western Hemisphere story is Mexico. No country was hit harder by the rise of China in the 1990s. Border cities now scarred by drug violence were touted in the 1990s as the factories of America, unleashed by the free-trade zone of the North American Free Trade Agreement. Those factories were decimated by cheaper alternatives in China.

But now that wages in China have risen so sharply, Mexico is again becoming a regional manufacturing power. It boasts a functional democracy, an invigorated new government led by a charismatic young president and a highly educated young population more interested in pragmatic advancement than the often rigid ideologies and corruptions that defined Mexico in the past.

And if Mexico thrives, along with undeniably potent, rich and creative Canada, the United States will be a clear beneficiary.

As these trends carry into 2013, the ratio of anxiety to hope, suffering to flourishing, haves to have-nots will send just enough mixed signals to give glass-half-empty people reason to fret and glass-half-full people reason to celebrate. The leading indicators, big simple averages that they are, will continue to confound, eliding as they do the vast variety of experiences both in the United States and throughout the world. Yet more people will continue to emerge into the middle class globally in 2013 than any year in human history. There will be less disease, more caloric abundance and increased life spans even with the attendant risks of climate change.

And in the United States, the paradox of plenty will continue to bedevil easy generalizations, however easily those are made in politics, in the media and in heated arguments across the country. Americans are wealthier, healthier and more secure today than any group of people have been. Ever.

That may not make us happy, and that generalization may not be true for many, many people. But it is our condition today -- and one we will grapple with long after the fiscal cliff, debt ceilings and Tea Parties are a dim memory.

This post originally appeared at, an Atlantic partner site.