Wednesday, November 28, 2012

Why the term "fiscal cliff" is irresponsible.

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Due to terminology, as far as we know, if Congress doesn't work out a deal to fix up the US' federal deficit by 31 December -when we reach the "fiscal cliff" - the world will end. What nonsense. The "cliff" connotes everything will go belly-up if we reach 31 December with no deal - this is very untrue.

In fact, if no deal is struck, when you wake from your stonking New Year hangover on 1 January, nothing will have changed. The first time people will notice anything different is when they are paid for days worked in January, and they will pay a slightly higher tax rate as the Bush tax cuts would have expired. While this isn't awesome, it can be fixed retroactively: in other words, if a deal is reached in January, you will pay less tax in February to make up for it, and a similar amount of money remains running around the economy. Some folks, particularly those earning a lot, will only notice a tax increase when they file before the annual April deadline. 

Desirable? No. A "cliff"? Hardly. 

The other aspect of this whole scenario is the automatic budget cuts of $1.2-trillion. This money doesn't all vanish on 1 January 2012. These budget cuts are phased in over ten years, and even without an agreement the bean-counters and decision makers in government can soften the blow using stuff like logic and common sense. 

Again, undesirable. But hardly earth-shattering. 

Calling this a "fiscal cliff" has the very real potential of spooking the markets, and then the "cliff" will be a self-fulfilling prophecy. Responsible reporting would have indicated that Federal Reserve chairman Ben Bernanke's term for this is incorrect. Should Congress not come up with a deal before 31 December (which today's talking points on cable news seem to point to), there is very little to really stuff with the economy in the short term.

Unless, of course, we think it is all going to. 

Incidentally, ignore the pontificating by House and Senate members about whose fault this is. Creating this 31 December deadline was passed by Congress in August 2011 to force negotiations (269-161 in the House and 74-26 in the Senate). 

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