Some commentators and journalists have pointed out the metaphor for the impending tax increases and spending cuts in 2013–the “fiscal cliff”–is highly misleading, and probably intentionally so. There is no way to reverse course when you fall off a cliff; you are plummeting towards the ground, making a terrible mess upon impact. Thus the brakes must be applied before the end of the year.
In reality, this isn’t true; Congress and the White House can actually go past the “cliff” deadline, and strike a deal early next year, without the supposedly dire consequences. The numbers thrown around in the press represent the tax/spending impacts from an entire year of living beyond the cliff. As Paul Krugman wrote (11/9/12), “the fiscal cliff isn’t really a cliff” and “nothing very bad will happen to the economy if agreement isn’t reached until a few weeks or even a few months into 2013.”
That’s reality. But here’s the graph that takes up much of the front page of today’s edition of USA Today (11/14/12):
Subtle, right? The story that accompanies the frightening image doesn’t do much to calm fears.
And over at the Washington Post (11/14/12), Neil Irwin attempts to rebut the idea that going over the “cliff” for a short while wouldn’t that bad. “The Economy (Probably) Can’t Survive a Short Dive Into Austerity Crisis” reads the headline. Irwin writes that those who say the cliff analogy is wrong–people like Krugman and economist Dean Baker–are probably mistaken:
Some would argue that it won’t be very bad at all. That’s the answer the normal analytical tools would offer. But this is one of those situations where the normal analytical tools might be leading people astray: There is every reason to think even a short exercise in cliff-diving would hurt quite a lot.
Irwin here sounds remarkably like a pre-election pundit pontificating about Nate Silver. If there’s “every reason” to believe the “normal analytical tools” don’t apply, what are they? Irwin gives readers a quote from an economist at J.P. Morgan Chase–and then reverts to arguing that actually it probably wouldn’t be so bad:
In a narrow sense, a short voyage off the cliff shouldn’t crush the economy too badly. The CBO estimates that the full brunt of the policies add up to about $56 billion a month, which is a lot of money–about 4 percent of GDP–but should, in theory at least, do only modest damage to the economy if it lasted only a few weeks. One month of austerity along those lines would subtract only about a third of a percentage point from growth for the full year, before accounting for multiplier effects.
I’m not sure what “shouldn’t crush the economy too badly” means, but it’s not that important, since Irwin still thinks things will be bad:
But all this seems like a naïve way of viewing the situation, one divorced from the real ways that markets and psychology interact with economic forces.
So the real point–for those who aren’t naïve, apparently–is that CEOs are worried about the cliff. They talk about it a lot; some “will reconsider their own capital spending and hiring plans,” perhaps. And: “Markets don’t like risk.” To which he adds:
The economic impacts of any legislative debate are almost impossible to measure in real time. But the stock market renders its verdict every second of the trading day. If the talks are going off the rails in the final days of December, with no accord in sight, it may well be the markets, looking forward to the ill-effects to come, that provide a certain focus for recalcitrant lawmakers.
So the market could start to panic a bit, which would prod some lawmakers to make a deal before we reach the cliff.
For a piece that’s supposed to tell us why going over the cliff for a little while would be bad news, Irwin manages instead to make the counter-argument.