The Fiscal Cliff

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"The fiscal cliff", is a poor name, that obscures through metaphor. Call it what it is:  a little deficit reduction. All the cries to "not go over the cliff" are cries to not reduce the deficit. CNBC, usually middle-of-road is running a campaign called "Rise Above", asking law-makers not to reduce the deficit (i.e. not to go over the cliff)!

Taxes will rise if: 
  • the "Bush tax cuts" and "AMT exception" expire, 
  • the Payroll tax goes back, up to its normal rate
Some government spending will falls if:
  • unemployment benefits go back down to their normal rate
  • "sequestration" agreed to when extending the debt-ceiling kicks in
Too much too soon: Keynesians never want to reduce deficits, but they couch their appeal saying: "don't cut right now", "don't cut too much" or "don't cut too abruptly". Yes, tightening will cause some short-term pain, but it'll be worse later.

Wake up call needed: Consider the Personal Savings Rate. After the current bust, it rose from a low of 2% to about 4%. That shows people changing behavior, but not enough. It has started to waver. If people really thought we were facing a "new normal" in the economy, and that entitlements were going to be reduced, this rate would rise further as people cut back spending.

So, while a recession causes pain and disruption, perhaps a second downturn (as opposed to our flat stagnation) is a required wake up call.


 Will probably be avoided: The consensus of political gurus seems to be that the Democrats and GOP will reach a deal. However, there is no point reaching a deal that postpones the issue, or even makes it worse by adding more fiscal "stimulus".






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