united states project

The fiscal whatchamacallit

Media’s embrace of “fiscal cliff” obscures the real story about budget negotiations
November 9, 2012

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.

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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.

An aggressive partisan approach also might not be to Obama’s liking—he seems quite sincerely committed to the ideal of bipartisanship and also to a “grand bargain” on fiscal issues, which might be harder to achieve if he played hardball on taxes. But going over the “cliff” would be a viable course of action—precisely because the cliff is not a cliff at all.

Strategy, gamesmanship, power grabs—these are things that political reporters absolutely love to write about, right? Well, apparently not. Coverage of the issue in leading newspapers in the days since the election has uncritically embraced the “fiscal cliff” metaphor, ignored the key points about leverage, and instead beat the drums for a grand bargain before the New Year.

For instance, in Thursday’s New York Times Jackie Calmes and Peter Baker opened their story with Obama’s efforts to address “the main unfinished business of his term—a major deficit-reduction deal to avert a looming fiscal crisis.” Later, they write:

The efforts from both sides, after a long and exhausting campaign, suggested the urgency of acting in the few weeks before roughly $700 billion in automatic tax increases and across-the-board spending cuts take effect at year’s end — the “fiscal cliff.” A failure to reach agreement could arrest the economic recovery.

Corporate America and financial markets for months have been dreading the prospect of a partisan impasse. Stocks fell on Wednesday, with the Standard & Poor’s 500 Index closing down 2.4 percent. The reasons for the drop were unclear, given that stock futures did not drop significantly on Tuesday night as the election results became clear. Analysts cited fears about the economic impact of such big federal spending cuts and tax increases, but also about new economic troubles in Europe.

“Corporate America”—i.e., the CEOs of major businesses—has been ringing alarm bells about the fiscal cliff for awhile now. The fact that these guys are all in the top income tax bracket could have something to do with that, but that point hasn’t been raised in most coverage.

In Friday’s NYT, Jonathan Weisman took a similar tack, making an interesting choice that subtly communicates the “urgency” of getting a deal done in the lame-duck session: he gave the first quote in his article to a lawmaker who won’t even be in Congress come January:

Senator Olympia J. Snowe, the Maine Republican who will retire at the end of the year, made it clear that she intended to press for a deal to avert the so-called fiscal cliff and get serious on the deficit, lame duck or not.

“The message and signals we send in the coming days could bear serious consequences for this country,” she said. “It could trigger another downgrade. It could trigger a global financial crisis. This is a very consequential moment.”

Times readers, here’s a tip: if you want to know what people on Capitol Hill and in the White House are saying, you’ve got to read the politics pages. But if you want a better handle on the underlying reality of the fiscal situation, search out the bylines, like Lowrey’s, from the paper’s business and economics desk.

Readers of The Wall Street Journal were treated to similar stuff. A “fiscal cliff” headline was bannered across the top of Thursday’s print edition, and the story’s opening contained this passage:

But the pressure is on. Deep, automatic federal-spending cuts and tax increases—a combination widely known as the “fiscal cliff”—will hit in January unless Mr. Obama and Congress agree to some other way to reduce the budget deficit.

Going over the cliff, economists say, would not only risk another recession, but would intensify anxiety about the dysfunction of the U.S. political system. Uncertainty over political turmoil could lead to more turbulence like Wednesday, when the Dow Jones Industrial Average fell 312.95 points, or 2.4%, to 12932.73. That was this year’s largest decline in both points and percentage terms. Asian markets also fell in early trading Thursday, with Tokyo down 1.2% and South Korea down 1.4%.

Online, that was accompanied by a poll in which readers could choose either that “necessary compromises will be made” or that “we’ll go over the cliff.” And just to drive the metaphor home a bit further, the story was accompanied by an explainer video in which economics editor David Wessel literally stands on top of a cliff. (To be fair, the budget explainer in the video is pretty good. And six minutes in, esteemed budget hawk Alice Rivlin acknowledges that it wouldn’t necessarily be an economic catastrophe to go over the cliff—though it would be a “demonstration that there was no hand on the tiller.” But by then, the thrust is clear.)

Friday’s Journal had more of the same on page one, and gave prominent play to a new CBO report that described, again, how bad it would be for the economy if all the scheduled tax hikes and spending cuts go into effect. (A nice graphic broke down the impact of different provisions, according to the CBO.) That’s true, but it’s not news—and it seems unlikely to happen, whether or not a deal is reached by the end of the year.

There is an important “to be fair” point here: assuming the political coverage is accurate, Obama and Senate Democrats do seem to be searching for some bipartisan compromise in the coming weeks. That might mean kicking the can down the road (in other words, calling off the “cliff,” which is an arbitrary creation of Congress in the first place). Or it might mean actually reaching agreement on a big tax and spending deal, of the sort Obama sought in vain for much of 2011. If that’s what’s happening, of course political reporters should tell us about it.

But if that’s the course negotiations take, it’s because important players in Washington chose that course over other possible courses—not because they were at the brink of a cliff, or because they faced up to the “necessary compromises” that had to be made. Readers deserve clear-eyed reporting that says as much.

Update: In the wake of House Speaker John Boehner’s Friday’s press conference, Yglesias has a new column that takes a longer look at the leverage issue. It’s a recommended read.

Greg Marx is an associate editor at CJR. Follow him on Twitter @gregamarx.