“Fiscal Cliff” is a bad name. It’s one of those terms that the media love, because it sounds dramatic and terrifying. People stay tuned when they hear terms like “Fiscal Cliff”.
That’s not to say that the Fiscal Cliff isn’t serious or important. It is. But it’s not a cliff.
A “cliff” is something sharp and jagged and high, something that, should one fall off it, one plummets hundreds of feet to one’s inevitable death. (“Fiscal” just means having to do with finances. I’m okay with that part.)
When pundits and politicians speak of “going over the Fiscal Cliff”, they mean essentially passing the milestone of midnight on December 31, 2012, the implication being that as of 12:01 on January 1, 2013, the U.S. economy will immediately be in free fall, plunging precipitously toward our collective death.
The reality is less dramatic and less headline-grabbing. If Congress and the President fail to resolve the current political impasse, on January 1, 2013, there will be substantial spending cuts to many federal programs, and tax rates will increase significantly for most Americans.
How much of an immediate impact this would have depends mostly on how long it lasts, and on how consumers and firms react to it. If the impasse lasts just a day or three, or even a week, into 2013, the direct impact would be relatively small. Even a spending cut of 10 percent and a tax increase of 20 percent would only represent a small sliver of GDP, if it only lasted for one-fiftieth of the year.
What’s more substantial are the indirect, psychological effects, particularly from news anchors throwing around ominous-sound words like “cliff”. Firms already are balking at future investment spending, and consumers who are already edgy about their future prospects are going to be very leery about spending money over the holidays if the impasse remains unresolved. Uncertainty is rarely a good thing for an economy.
One thing we don’t need is fear-mongering and over-dramatization. The current political standoff about federal spending and taxation is many things, but a “cliff” is not one of them.
Let’s call it for what it is: A Fiscal Impasse. No one’s falling off of anything on January 1.