Despite the dramatic terminology and a flood of news stories, the economy is not about to go over a fiscal cliff. The fiscal cliff is a change in the budgetary status quo that will occur if no agreement is made to stop it. We would go back to a Clinton-era tax structure and have substantial cuts in federal expenditures. How bad would that be, if it actually happened? But there’s no need to even consider that question seriously, because it will not happen.
Even if no agreement is made by the end of the year, one will be made soon after, because none of our politicians want the fiscal cliff to become our new status quo; that is, they don’t want those tax increases and spending cuts.
The real problem the fiscal cliff presents to the economy is uncertainty. People make more timid business decisions when they are uncertain about future tax rates and future expenditures on government programs. The fiscal cliff hurts us not because we might fall off it, but because we know that changes are imminent that will keep us from falling off; we just don’t know what those changes will be.
Part of the uncertainty is that we don’t know how far any agreement that is made will actually go toward addressing the serious fiscal issues we face. We have seen time and time again that rather than actually addressing structural problems in the federal budget, Congress and the president are satisfied just to kick the problem further down the road. That’s what produced the fiscal cliff in the first place.