In one way, the so-called fiscal cliff threatening the U.S. economy is less dangerous than widely supposed. In another, it’s more.
First, as many have said, the cliff is really a slope. At year’s end, the tax cuts passed in 2001 and 2003 automatically expire, and a deliberately brainless process of sequestration starts to cut public spending. But the full fiscal effects of both events don’t arrive all at once. The changes would have to be sustained — or be expected to be sustained — to drive the economy into a recession.
Neither is likely. Businesses and consumers would see any start down the slope as temporary. They would expect some resolution of the fiscal problem in short order. Meanwhile, various maneuvers could be used to postpone the harm. The Internal Revenue Service could delay the additional tax withholding, for instance. Departments and agencies could think about how to phase in cuts over the course of the year.
When a government defaults, that’s it — so the debt ceiling really is a cliff. The fiscal slope is a less brutal kind of government dysfunction. Now that gauging various degrees of government paralysis has become the main task of U.S. political analysts, the difference is probably worth noting.
What matters, though, is not the damage that a temporary change in fiscal policy will cause at the end of the year, but the harm that the prevailing uncertainty over policy has already caused — and will keep causing, even if the fiscal slope is avoided.
Big U.S. companies are scaling back their investment plans at the fastest pace in almost three years, according to a new Wall Street Journal review of securities filings and conference calls.
Confidence in the domestic economy is low. Weaker economies abroad, especially in China and the eurozone, aren’t helping. The U.S. needs clarity about the fiscal outlook, and that will be hard to achieve.
Grand fiscal bargain needed
Suppose Congress and President Barack Obama’s administration simply leave policy unchanged for six months — no tax increases, no sequesters — while they negotiate a big new fiscal agreement. That would avoid the immediate threat, but wouldn’t resolve the underlying uncertainty. A deal like that would be better than falling down the slope, for sure, but it wouldn’t dispel the confusion or get the economy growing.
For that, the country needs what it has needed for the past few years: A grand fiscal bargain. Call it Simpson-Bowles for slow learners. Eventually, Congress and the administration will get around to the plan put forward by the National Commission on Fiscal Responsibility and Reform, or something close, because in the end they will have no choice. But a plan like that is too complicated to design by Dec. 31.
On such a compressed timeline, the best that can be hoped for is an agreement to avoid the fiscal slope plus a statement of principles to shape the bigger deal. For that declaration to be of any use, it must be credible — and it can be credible if, and only if, both sides startle everybody by saying what they are willing to give up. If a deal to avoid the slope just postpones the entire discussion, allowing Democrats and Republicans to press their maximal demands again next year, it will achieve little. If both sides yield just a bit, and do it now, that would be a success.
Clive Crook is a Bloomberg View columnist.