With Election Day behind us, all of Washington is suddenly focused on a looming issue that drew little notice during the campaign: the “fiscal cliff” of tax hikes and spending cuts that are scheduled to occur on Jan. 1, and that, if they do take hold, could tip the economy back into recession. It all sounds pretty scary. But should the media really be describing the impending changes as a “cliff”?
As Slate’s Matt Yglesias noted in a great post Wednesday, there’s a problem with the metaphor that the media and political elites have seized onto—the “fiscal cliff” is not really like a cliff at all:
A salient fact about non-metaphorical cliffs is that falling over them is generally irreversible. If the cliff is high enough that falling off of it would kill you, then if you fall off you’re going to die and that’s the end of it. The “fiscal cliff” by contrast isn’t like that at all.
Rather, it’s a set of policy changes—mostly tax hikes plus some steep spending cuts—that if they were all locked into place would constitute a significant drag on economic growth over the course of a year. But if the Bush tax cuts fully expire on a Tuesday morning it’s not as if some catastrophe strikes on Wednesday where suddenly middle class families have no money. It’s true that if the new higher rates were to be locked in, then the medium-term drag on middle class take home pay would delay the deleveraging cycle and damage the recovery. But to resolve that, all you need to do is introduce a new package of middle class tax cuts on Wednesday afternoon, have congress pass it on Thursday, and then the president signs it on Friday. The fact that taxes were higher for three days—or even three weeks—is simply not that consequential.
It’s an important point, and also one that left-leaning think tanks and some journalists have been making for awhile now. In early October, The Washington Post’s Ezra Klein wrote about the logic behind a couple alternative metaphors for the scheduled budget changes, like “fiscal slope” and “fiscal collision course.” The “fiscal slope” analogy comes from the Center for Budget and Policy Priorities, whose analysis was the subject of an Oct. 9 New York Times article by Annie Lowrey.
The difference is not just semantic. The economic reality is connected to a key point about political leverage. One of the deepest divides between President Obama and the Republicans who control the House is on the fate of the Bush tax cuts: Obama wants to let rates rise back to Clinton-era levels on the richest households while preserving the current rates for everybody else; Republicans want to maintain the current lower rates for everybody (though especially the rich). It’s very hard to shift the status quo without bipartisan agreement, and Obama, and the congressional Democrats who side with him, have never really had the upper hand in this debate.
If we were to go over the “cliff,” though, leverage might shift. In that case, rates on non-rich households would be at a level that everyone agrees is too high, and there could be bipartisan agreement about reducing those taxes. Meanwhile, there would be disagreement and gridlock about what to do regarding the higher rates for the wealthy—exactly what Obama wants. And conveniently for the president, the top-end tax cuts are one of the least stimulative policies whose fate is up in the air, so their expiration would do relatively little to harm the recovery.
Over the course of a full year, the full impact of the “fiscal cliff” would be deeply harmful to the economy. So if going over it were irrevocable, this would amount to a Pyrrhic victory; Obama would have won his tax agenda at the cost of a new recession. If it’s a “slope,” though, this presidential leverage is real, and the way Obama could grab it is precisely by not making a deal during the lame-duck session.
An aggressive strategy by Obama still wouldn’t be without risk—House Republicans know a thing or two about leverage, and they’re on the lookout now for hostages to take, as a good Lowrey story in Friday’s NYT makes clear. And there are other important policy pieces of the “cliff,” like the payroll tax cut and the scheduled spending reductions, that could be affected in unforeseen ways, with potential peril for both the economy and Obama’s agenda.