Part 2 – What Is the Fiscal Cliff Really All About?

There are 3 components in this section of “The Fiscal Cliff Explained”:

• What Is the Fiscal Cliff?
• What Is the Fiscal Cliff in One Sentence?
• If It’s Not a Cliff, What Is It?

What Is the Fiscal Cliff?

The fiscal cliff is an inapt metaphor for the looming consequences of some very bad congressional decisions.

On or around Jan. 1, about $500 billion in tax increases and $200 billion in spending cuts (see table 1) are scheduled to take effect. That’s equal to about four percent of GDP, which is, according to the Congressional Budget Office, more than enough to throw us into a recession (more on that later).

Data: Economic Policy Institute

Analysts disagree on exactly how quickly the recession would begin. That’s why the “cliff” metaphor is inapt. If financial markets freak out, it might happen very quickly, proving the “cliff” imagery correct. But it might happen gradually, affirming those who’ve argued it’s a “slope.”

Either way, both parties agree it shouldn’t be permitted to happen at all. But that’s the rub. The reason that the fiscal cliff could push us into another recession in 2013 is because it enacts too much deficit reduction upfront, not too little. And yet, deficit reduction is something that most members of Congress support, at least in the abstract. So both sides want to replace the fiscal cliff with…something. The question is, with what?

What Is the Fiscal Cliff In One Sentence?

Much too much austerity, much too quickly.

If It’s Not a Cliff, What Is It?

The term “fiscal cliff” comes from testimony Fed Chairman Ben Bernanke delivered before Congress earlier this year. But, as we mentioned, the “cliff” imagery has sparked some dissent. The Center on Budget and Policy Priorities thinks it’s more of a “slope.” The Economic Policy Institute calls it an “obstacle course.”

We at Wonkblog call it the austerity crisis.” That solves two problems. First, the danger the economy faces is too much austerity too quickly, so swapping the term “fiscal” for the word “austerity” actually better reflects the situation. Second, while we don’t know if it’ll be a cliff or a slope, we do know that it will, if permitted to go on for long enough, be a “crisis.” Thus, the “austerity crisis.”