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Roll Call

Some Argue Fiscal Cliff May Not Be All That Scary

Remember the fiscal cliff that everyone from Federal Reserve Board Chairman Ben Bernanke to analysts of every political stripe to media pundits have been talking about so incessantly in recent weeks as something that absolutely has to be avoided?

Yes, that fiscal cliff: the one weve repeatedly been told will result in end-of-the-world damage for the economy as the clock strikes midnight on Jan. 1 and the one that has been driving up the nations collective blood pressure to such an extent that were all going to need the economic equivalent of Valium to get through the coming months.

Well, it turns out that the cliff isnt that scary after all, really shouldnt be seen as the moment when all economic hell will break loose and isnt actually something that has to be avoided at all costs.

At least thats the conclusion of a well-conceived, well-written and convincing analysis released last week by the Center on Budget and Policy Priorities that explains why fears induced by the fiscal cliff are misguided and wont plunge the economy into an immediate recession.

A quick word about the CBPP: Almost everyone takes its analyses seriously. Its staff includes not only some of the most reputable federal budget analysts in Washington, but the analysts that other analysts go to for information, advice and reality checks. Theyre highly experienced, credentialed and credible. Even those who disagree with the CBPPs politics seldom, if ever, argue with its understanding of the budget process.

Thats only one of two reasons I found the CBPPs analysis that the cliff isnt as scary as weve been told to be so convincing. The other is that the analysis ignored the frightening headlines and instead considered the actual mechanics of how the federal budget works. In doing so, it discovered (actually, reminded is probably more accurate) that little happens instantly in the world of the federal budget.

The CBPPs conclusion is simple: There will be little immediate effect if the increase in taxes and cuts in spending that will happen during the period from midnight Dec. 31 to midnight Jan. 2 go into effect.

In other words, there is no steep fiscal cliff off of which the U.S. economy will take an abrupt nosedive if the tax increase and spending cut policies are triggered.

The CBPP correctly points out that the spending cuts scheduled to occur Jan. 2 because the anything-but-super committee failed to agree on a deficit reduction plan are reductions in spending authority. The actual reductions in spending outlays in federal budget jargon wont occur all at once as the visual image of a fiscal cliff virtually demands you picture, but rather, as the CBPP says over the course of the year and into subsequent years. Therefore, there will be little immediate direct negative effect and an inability or unwillingness to make a decision by Jan.  2 will not plunge the economy into darkness.

The same is true of most of the fiscal cliff tax changes. The CBPP points out again quite correctly that the individual income tax increases will not immediately reduce taxpayers cash flow by the total but rather by a very small amount. And the increase in the alternative minimum tax for those who become subject to it for the first time in 2012 because it isnt fixed by Dec. 31 wont be felt at all until each taxpayer files her, his, or their tax return for the year. Given that a taxpayer doesnt typically receive the W-2s they need to file until later in January, that means that there will be plenty of time to deal with this retroactively before it starts to bite.

These spending cuts and tax provisions alone make up more than half of the projected direct effect of the fiscal cliff. Add the limited immediate effect of the other provisions, and the fiscal cliff becomes one of the biggest misnomers and misconceptions in federal budget history.

Thats a good thing because, as Ive explained in a previous column, last-minute, desperate legislating in a lame-duck session of Congress in general is never a good idea. Its especially not something that should be planned or hoped for when the decisions, like these, are potentially momentous and the time pressures appear to be extreme. In the current hyper-
partisan take-no-prisoners political environment in Washington that could be even worse between Election Day and the start of the next session of Congress, thats a recipe for a policy disaster.

Thats why the CBPP analysis is very good news. The wisdom that has become increasingly common since Bernanke first uttered the phrase fiscal cliff is not as accurate as weve been told up to now.

Yes, as the Congressional Budget Office pointed out in its bold report from several weeks ago, the combination of spending cuts and tax increases that will occur Jan. 1 and 2 will, if theyre not modified, push the U.S. economy into a recession.

But that wont happen instantly and, no matter whats being said, Congress and the White House dont have to agree to just any deal to resolve the situation by the time these policies are triggered to prevent the projected damage.

Stan Collender is a partner at Qorvis Communications and founder of the blog Capital Gains and Games. He is also the author of The Guide to the Federal Budget.

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