First, we had the fiscal cliff. Now we have the fiscal clifflet. Expectations about the fiscal cliff mean we’re already sliding down it. And it’s steeper than we thought. I call all of this fiscalcliffmongering: spreading hype that an economic apocalypse is going to happen if Congress doesn’t delay a bunch of tax hikes and spending cuts in January.
Just two days ago, everybody was talking about the new terrible CBO report:
The Congressional Budget Office issued new dire projections for the U.S. economy on Wednesday, warning that if lawmakers failed to act, the large-scale fiscal tightening set to occur next year will push the nation into a deeper downturn than previously thought and cause the unemployment rate to jump back up to about 9%.
Maybe I’m naive; there are a lot of Smarter People claiming that we need to stop the Bush-Obama tax cuts from expiring or Obama’s payroll tax cut from expiring or the sequestration cuts from happening in addition to the usual “doc fix” and AMT fix, and that if we don’t do some or all of these things terrible things will happen to the economy. Sometimes these claims are accompanied by an admission that the national debt is a long-term problem, but that the economy is too fragile to fix it right now. Like St. Augustine, they cry, “Lord, make me chaste – but not yet!”
I’ve heard that the CBO has projected that the best thing for Congress to do about the debt is to… do nothing. The LA Times article above does hint that while the fiscal cliff might send us into recession next year, it would lead to lower deficits in 2014. So I did what any aspiring amateur econ-journalist-blogger would do: I looked up the actual CBO report.
The report estimates that under current law, where we change nothing and jump over the fiscal cliff with eyes wide open…
As the economy adjusts to a lower path for budget deficits, real GDP is projected to begin growing again in late 2013. The pace of economic expansion will average 4.3 percent from 2014 through 2017…
Oh, the horror! And under the “alternative fiscal scenario,” where Congress extends all the stuff they always pretend is temporary?
Real GDP would be higher in the first few years of the projection period than in CBO’s baseline economic forecast, and the unemployment rate would be lower. [yay!!!!!] However, the persistence of large budget deficits and rapidly escalating federal debt would hinder national saving and investment, thus reducing GDP and income relative to the levels that would occur with smaller deficits. [ohh….] In the later part of the projection period, the economy would grow more slowly than in CBO’s baseline, and interest rates would be higher. Ultimately, the policies assumed in the alternative fiscal scenario would lead to a level of federal debt that would be unsustainable from both a budgetary and an economic perspective.
To me, that sounds like we could go over a little “fiscal cliff” now that maybe causes a short recession and returns to growth in less than a year, or keep rolling towards the real cliff of “a level of federal debt that would be unsustainable.” (Now you may not believe the CBO is smart enough to predict the future; the point is that people are citing the CBO as proof of how bad the fiscal cliff would be, but I don’t think the CBO even thinks it looks that bad, and it looks better than the “alternative” in the long run.)
I have to be careful about my own bias here, but I feel like the fiscalcliffmongerers are hyping how bad this smaller cliff would be. I keep seeing analysts and economists say expectations of the fiscal cliff are already hurting the economy without presenting any evidence that this is actually happening. “This serves as a drag on corporate hiring”? Job openings are supposedly at a four-year high. The stock market is up, too.
Now it’s entirely possible that the market is pricing in an expected extension; we’ll find out soon enough. But I don’t see any evidence that the market is afraid of the fiscal cliff already. Like Justin Wolfers’s and Betsey Stevenson’s weak, contradictory, and cherry-picked assertion that last year’s debt ceiling debate hurt the economy, this fiscalcliffmongering feels to me like more ideological attempts to defend an unnecessary and unsustainable level of government spending, debt, and intervention in the economy.
I know a good chunk of this cliff’s deficit reduction comes from “raised” taxes, and small government folks are supposed to like lower taxes. But temporarily cutting taxes without cutting spending gives us a more irresponsible government that’s not any smaller. (It is kind of funny to me, though, that some of the same people who claim that lower taxes don’t stimulate the economy are claiming that higher taxes will hurt it.)
Given our government’s proclivity for changing its past commitments to the future, I have extremely low expectations that we would take any relative growth from averting this fiscal cliff to finally create a sustainable deficit plan. There will just be another fiscal cliff to worry about twelve months later; if the government is artificially inflating the economy, there will always be some temporary pain involved in deflating it back to normal. But if we never deflate, we will eventually pop. It’s not a question of whether or not we should jump off next year’s fiscal cliff. We’re going to jump off a cliff; it’s only a question of which one.