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Home Publications Blogs Beat the Press Serious People Could be Seriously Embarrassed: Why It's Important that We Not Go Off the "Fiscal Cliff"

Serious People Could be Seriously Embarrassed: Why It's Important that We Not Go Off the "Fiscal Cliff"

Friday, 14 December 2012 09:51

Much of the media has spent the last month and a half hyping the impact of the "fiscal cliff," the tax increases and spending cuts that are scheduled to take effect at the end of the year. They have been warning of a recession and other dire consequences if a deal is not struck by December 31st. As we are now getting down to the final two weeks and the prospect that there will not be a deal becomes more likely, many in the media are getting more frantic.

What they fear is yet another huge embarrassment, if people see the deadline come and go and the economy doesn't crash and the world doesn't end. The reality, as all budget analysts know, is that no one will see more taxes coming out of their paychecks until they actually get paid later in the month. If a deal is imminent or actually struck in the first weeks of January then most workers will never be taxed at the higher Clinton era rate. They will be taxed in accordance with the deal that President Obama reaches with the Republicans.

And those who do have money taken out of a check will have it returned in the next one. This might be bad news for people who are skimming by paycheck to paycheck, but the impact on the economy will be too small to measure.

The same applies on the spending side. If President Obama sees a deal in sight then he will adjust spending in accordance with the amount that he expects to agree to with Congress, not the amount specified in the sequester. The impact on the economy will be essentially zero, except of course for the impact of the budget cuts that Congress and President Obama actually agree to put in place.

In other words, if January 1, 2013 comes and there is no deal, we will likely see that the Serious People were again out to lunch. This will be yet another blow to the credibility of the people who are telling us that we have to cut Social Security and Medicare and do all sorts of other things that somehow always seem to have the effect of hurting the poor and middle class.

Of course many may say that the Serious People have recovered from past humiliations. After all, how long did it take them to get over the fact that not one of them was able to see the $8 trillion housing bubble whose collapse wrecked the economy? And there can be little doubt that they will quickly rewrite the history so that none of them was actually issuing the dire warnings we keep hearing about the fiscal cliff.

But some people will remember, and there will always be people rude enough to bring up past mistakes. So the Serious People really do have a lot at stake here. If we go past January 1 and there is no deal, they will be very unhappy.

Comments (12)Add Comment
what the Republicans really want
written by Jennifer Reft, December 14, 2012 9:32
This is the next Washington Post headline. http://onion.com/Uevr4U
written by Chris, December 14, 2012 9:56
I noticed you didn't address my last comment in your other post, so I'll essentially repeat myself...whether or not the fiscal cliff registers as disastrous on a macro data level is irrelevant to the 2.1 million Americans who will have their unemployment benefits run out. Food stamps won't pay the bills, and they will be in a very serious situation.

So while I agree that the hype is overblown in the aggregate analytical sense, 2.1 million families will be very unhappy, not just the Serious People...and that will create real misery in our society.

I'm worried that your dismissive tone ignores the real pain that will be inflicted on the 29th of December if there's no emergency extension of their benefits.
corrupting the young
written by Peter K., December 14, 2012 10:17
"But some people will remember, and there will always be people rude enough to bring up past mistakes. So the Serious People really do have a lot at stake here. If we go past January 1 and there is no deal, they will be very unhappy."

Also, there are young people who are looking at these issues in real-time for the very first time. Some trust authority but others have had bad experiences with authority and will notice and remember that the media got it wrong and the will remember how and why they got it wrong. Some of those who tend to trust authority nonetheless place high importance on facts, reason and logic and will witness for the first time in real-time how the media was wrong.
UI May not be included in a fiscal cliff deal
written by Dean, December 14, 2012 10:58

you're absolutely right that people getting UI and other benefits will be hurt if there is not an extension of the recession provisions by the end of the year. However, this is not what the Serious People are warning about. There is absolutely no guarantee that an extension of these programs will be included in a budget deal. The Rs really don't want them (as opposed to the tax cuts), and it is quite likely that Obama will give up ground on how much of the recession provisions are extended. In that case, the pain suffered by these people will not be due to the "cliff," but an agreement by President Obama and Congress to scale back benefits.
my money is on can kicking v. cliff diving
written by pete, December 14, 2012 11:00
Obama says now that he wants to raise the top rate, but then if they can agree upon spending cuts, possibly lowering it by September. That is of course just more uncertainty. If that is really on the cards, then they all should agree to kick the can to September, have yet another commission or gang or something. I.e., extend all the Obama nee Bush tax cuts to September. Or, in a similar logical, agree raise the top rate till September.
written by Chris, December 14, 2012 1:05

Thanks for your reply. You make some very good points. I'm just worried that all the tough talk and posturing against the Republicans is going to leave a lot of lower class Americans totally screwed in the crossfire. There's a lot of talk about the non-negotiable issues of Medicare eligible age changes and raising taxes on the rich -- but aside from some statements by the likes of Chuck Schumer, there isn't a lot of support to help these 2.1 million Americans after Christmas who are being marginalized by bad politics and a bad labor market/economy which they had not been instrumental in causing whatseoever.

So if we (centrists) play hardball and go over the cliff, these low class Americans end up cash-poor, if we have actual negotiations then we're probably going to have to give in on UI. When one analyzes the game-tree of such a situation, there's really bad odds for these Americans who will have a pretty bad new year if action isn't taken before the 29th. I just think about these casualties of the rhetorical policy battle.
the so called cliff
written by mel in oregon, December 14, 2012 1:20
as chris has pointed out the people getting unemployment benefits that stop will definitely be hurt. & just because the economy doesn't crash for the top half of americans with the gdp uneffected isn't really much to crow about. obama's history of giving away the store to republicans before negoiations start is a real cause for concern. obama is the same type of politician as his real mentor clinton, give away as much as possible to the wealthy so in return he profits handsomely from the wallstreet & outsourcing corporation's largesse. look does anyone really believe that clinton's help with the repeal of glass-steagall & enactment of "free trade agreements" wasn't a giveaway to the very wealthy? in return clinton became wealthy, & spent more on his daughter's wedding than many people make in a whole lifetime. obama's the exact same kind of character, look at his cabinet, full of wallstreet, destroy democracy, kind of scoundrels.
kicking the can ...
written by David, December 14, 2012 5:06
Pete, kicking the can isn't a good strategy. Obama should let Jan. 1 pass, to further discredit the VSPs, which they wholly and utterly deserve. Read the second paragraph on Hoover here: http://en.wikipedia.org/wiki/Herbert_Hoover. Hoover went from 25% to 63% tax rate and increased corporate taxes. The wealthy should be grateful we don't need them to pitch in as much as that. Of course, if they'd just allow a large enough stimulus package through, then they can keep their damned tax savings.
written by MarkJ, December 14, 2012 6:29
I thing the R's said it well today. When the going gets tough Congress leaves and goes home.

BTW, Buscuit looks good in red.
Let's All Hold Hands and Jump Together
written by Ron Alley, December 14, 2012 6:34
Actually, leaping off the fiscal cliff may be more like jumping off the curb and landing on the tarmac.
I didnt say it was a good strategy, David...
written by pete, December 15, 2012 10:08
I said 2 years ago we were in the same position. Obama made the same threat. And then he kicked the can. I thought at that time he should have let all the "irresponsible" Bush tax cuts expire, even though it would have cost me a lot. Indeed, when he said he was going to give me a reduction in the payroll tax, I thought he was nuts. Now apparently 98% of the Bush tax cuts (75% of the lost revenues) are quite responsible. Go figure. Kick the can. It ain't worth the pittance of revenue, especially with 30 year rates at 2.9%....better to borrow.
Repeal the Budget Control Act of 2012
written by Mary Bess, December 16, 2012 9:58
Congress could put an end to this charade and repeal the Budget Control Act of 2012. People have had it with this foolishness. We have real crises to deal with: unemployment, putting an end to immoral, wasteful wars, reforming the banking system, restoring civil liberties, among others.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.