Fiscal Cliff vs Fiscal Slope

Have you heard about the “fiscal cliff”?  This term refers to a number of tax and spending changes that are set to go into effect at the federal level at the end of this year, which when combined have the potential to significantly slow the nation’s economic growth.

The changes slated to go into effect at the end of 2012 include:

• Across-the-board federal spending cuts (also known as the “sequester”) approved in the aftermath of last year’s agreement to raise the debt ceiling;
• Expiration of the Bush tax cuts;
• The expiration of the payroll tax cut, which would increase the amount of payroll taxes workers pay from 4.2 percent of their wages to 6. 2 percent; and
• The end of all federally-funded unemployment benefits.

We should be concerned about these changes – but some have pointed out that the economy will not be devastated if the changes do go into effect for a short period.  In that way, the end of the year represents less of a “fiscal cliff” than a “fiscal slope.”  Jared Bernstein of the Center on Budget and Policy Priorities describes the difference between the terms this way: “Go over a cliff, and you're pretty much toast, like at the end of Thelma and Louise. Start down a slope and if you turn around soon enough, you don't have to go down too far.”

The distinction between a fiscal cliff and a slope is an important one, because it shapes our perceptions of how best to address the situation. If Congress takes no action, the combination of tax increases and significant cuts in federal spending could eventually slow the economy enough to put it back into a recession. But the bigger danger is that in an unnecessary rush to take action, Congress could lock in policies that have harmful effects on both the economy and working families.

Here’s how the Center on Budget and Policy Priorities describes the hazard of thinking of these changes as part of a “fiscal cliff”: 

"The greater danger is that misguided fears about the economy going over a "fiscal cliff" into another Great Recession will lead policymakers to believe they have to take some action, no matter how ill-conceived and damaging to long-term deficit reduction, before the end of the year, rather than craft a balanced plan that supports the economic recovery in the short term and promotes fiscal stabilization in the intermediate and longer run."

The New York Times argues that we will actually get a better result, and one more removed from partisan pressures, if Congress waits until 2013 to make decisions on these issues:

“Despite the vivid imagery of the fiscal cliff, the economy will not immediately plunge into recession if Congress does not reach a budget agreement before the new year. That’s because the recessionary impact of higher taxes and lower spending builds over time. Since election year politics make a sensible budget agreement all but impossible anytime soon, lawmakers — and President Obama and Mitt Romney — would ideally use this time to set out their solutions and ideas, without fear-mongering, and then actually enact a plan in the first few weeks of 2013.”

The tax increases and spending cuts that go into effect at the end of the year have the potential to put a brake on the recovery.  But that won’t happen immediately, and if we start down the fiscal slope, we still have the ability to turn around.

Tamarine Cornelius