Just How Much The Fiscal Cliff Is Being Hyped

As Calculated Risk (and many others) note, the term 'Fiscal Cliff' is a misnomer. The US economy is not going to fly off a cliff and implode on January 1 if we don't make a deal. There will be a drag due to higher taxes and lower spending, but much of that can and be wound back early in the year.

But the talk about the fiscal cliff has grown into a deafening roar, and here's proof that it's way out of proportion.

Matthew Fleury of Bank of America takes a look at the volume of articles mentioning The Fiscal Cliff and The Debt Ceiling:

fiscal cliff debt ceiling chart



As you can see, there's WAY more talk about the Fiscal Cliff than there was at the peak of the debt ceiling!

The debt ceiling standoff really was a threat to plunge the US into the abyss, as a default (which could have happened) would have inflicted untold damage onto the global financial system.

A recession is far less worse, and it's not even guaranteed, and the deadline is far less hard.

 Here's What's Probably Going To Happen With The Fiscal Cliff

Bill McBride at Calculated Risk has two must-read paragraphs on the so-called Fiscal Cliff:

My baseline forecast assumes a compromise on the fiscal slope (more of a "slope" than a "cliff", and January 1st is not a drop dead date). My current guess is an agreement will be reached AFTER January 1st - so that the Bush tax cuts can expire and certain politicians can claim they didn't vote to raise taxes (silly, but that is politics).

I expect the relief from the Alternative Minimum Tax (AMT) will be extended, the tax cuts for low to middle income families will be reenacted, and that most, but not all, of the defense spending cuts will be reversed (aka "sequestration"). However I think the payroll tax cut will probably not be extended, and tax rates on high income earners will increase a few percentage points to the Clinton era levels.

This is a very sensible, and important antidote to some of the Cliff hysteria that's permeated the media.

January 1 isn't a drop dead date. Later in the Spring there's a debt ceiling hike that has to happen, and that's more of a hard deadline, but it's not the end of the world if the tax and sequestration issues aren't dealt with in the next few weeks. Not only is there no 'bang' event on January 1, but letting the tax rates jump is a way for politicians to then vote to lower them, which is easier.

It would not be good to let everything expire permanently, as that would be a shock austerity that we don't need, but it's not a hit/not-hit scenario. Given the seriousness of the issues, better to not try to do a rush job in the middle of a media-induced, post-election fever.