You’re probably hearing a lot about this “fiscal cliff” thing nowadays. But unless you live in DC, work on Wall Street, or sleep with a copy of Pete Peterson’s autobiography tucked under your pillow, it’s possible that you have have no idea why everyone is freaking out.
Luckily, your ignorance can be cured. By learning some rudimentary facts about the fiscal cliff, you’ll be able to pontificate on today’s political and economic landscape like a pro, and you’ll have ammo to impress your friends at cocktail parties between now and the New Year.
In that spirit, we present our Absolute Moron’s Guide to the Fiscal Cliff.
So, first things first: What is a “physical cliff”?
It’s fiscal. As in, relating to government finances.
Ah. And cliff as in Clif Bars, right? LOVE THOSE THINGS. The white chocolate macadamia nut ones?
No. It’s “cliff,” as in a rock formation with a sharp drop-off.
I thought you said we were talking about politics. Now we’re talking geology?
Well, it’s not an actual cliff. It’s a metaphor for what happens if the U.S. government fails to reach a deficit-reduction deal by January 1.
That’s New Year’s Day! I’ll still be drunk, duh.
Of course you will. And if there’s no deal by the time the ball drops in Times Square, a set of tax hikes and spending cuts will automatically kick in.
Let’s take a step back. The origins of the fiscal cliff go all the way back to 2001.
The year I got my cartilage pierced!
Yes, and it’s also the year President George W. Bush signed a massive round of tax cuts. The tax cuts were supposed to expire ten years later, in 2011. President Obama later extended the expiration date to January 1, 2013. After that, your rates will go back up to the rates you paid in 2001. A bunch of other tax changes, like the expiration of a “payroll tax holiday” and the elimination of some tax credits, will also hit on January 1, meaning that no matter how much you pay now, you’ll probably pay more after the new year unless there's a deal.
On the one hand, I hate taxes. On the other hand, I am okay with taxes on other people. So who should I be hating here?
A lot of Republicans think any tax hikes are evil and fascist and anti-growth. And Democrats, led by President Obama, have promised to increase taxes on the wealthy to help close the deficit, while keeping the rates paid by the middle class more or less where they are. So basically, you have plenty of room to hate just about anyone you like.
So, okay, let's say we fall off the fiscal cliff. Taxes go up. What else?
Well, the other major part of the fiscal cliff is the implementation of the sequester.
Man, that Ryan Seacrest is absolutely everywhere these days!
Good one. The sequester is a fancy word for a set of deep spending cuts that will kick in automatically in January if there's no deal. These cuts were dreamed up in 2011, when the Budget Control Act was passed, to motivate Democrats and Republicans to work together on a compromise for reducing the deficit by making them scared of what would happen if they didn't.
Ooh, I did that once. My cousin Trina was trying to lose weight, and I told her I would buy her a bottle of Malibu if she could get down to a size 8 dress for prom. If she lost, I would get her Nintendo Wii.
That's not really the same ... actually, that is exactly the same thing. Anyway, the congressional committee that was supposed to reach a deal in 2011 failed, so now the sequester is a real possibility. The spending cuts would hit areas like defense and discretionary domestic spending particularly hard, and hurt many people who rely on government-sponsored social services. And economists believe that, combined with the mandatory tax hikes, they could push the country back into a recession.
That sounds ugly. Can't we just, like, agree to water down the whole thing? Trina only made it to a size 10, but I bought her the Malibu anyway. Nobody plays with Wii anymore.
Not according to what the politicians are saying now. Of course, if you admit beforehand that a size 10 prom dress is acceptable, you will get stuck buying a lot of Malibu.
Right. So if they don’t reach a deal, what happens?
Well, essentially, the deficit will get fixed very, very quickly. As Derek Thompson of The Atlantic has outlined, taxes would go way up, and spending would go way down — $1.2 trillion over ten years. It would be like like putting the entire country on a shock diet.
Would that be bad? Aren't Americans all fat anyway? Like my cousin Trina?
Yes, it would be bad. The Congressional Budget Office, or CBO, has estimated that economic output would shrink 2.9 percent in the first half of 2013, and unemployment could go back above 9 percent by the end of the year. But those things wouldn’t happen all at once on January 1. More likely, President Obama would use panic over the cliff as leverage to get a compromise on a longer-term solution.
This is all starting to sound like gobbledygook. Can you compare it to something I understand? Like, Justin Bieber and Selena Gomez breaking up?
Okay, I’ll try. So, imagine that, instead of breaking up with Justin for spending too much time with Barbara Palvin, Selena had gone to him and said, “Look, Justin, you want to hang out with Victoria’s Secret models. I want to keep being your girlfriend. Let’s work out a deal where each of us gets something we want." And imagine that Justin had said, "Yo, that sounds good, but you know how we fight. It's going to take forever!" And then Selena had said, "Okay, so how about this? Let’s put our feet to the fire by agreeing that, if we don’t come to a deal by the first of January, we’ll do something that harms both of our careers — like an experimental art-house movie about clowns, or an album of accordion duets. That will motivate us to find a mutually agreeable solution!”
I think I’m following! So Republicans in Congress are Justin, and President Obama is Selena, and the accordion album is the fiscal cliff?
Yes, sort of. Except that the real-life example is a bit more complicated, because congressional Republicans are adamantly opposed to raising revenue through increased taxes. Many of them have signed a pledge to a conservative activist named Grover Norquist that they won't raise taxes on anyone, for any reason. And President Obama has said he won’t tolerate a plan that doesn’t raise taxes on the highest earners. Of course, if they do nothing, taxes will go up a lot more anyway.
Basically, it’s a giant game of chicken between two competing economic theories, and the stakes are the health of the American economy.
Ooh, this is sort of fun! So why didn’t they call it the “fiscal chicken?” That sounds much snappier, and also delicious.
Well, Fed Chairman Ben Bernanke coined the term “fiscal cliff” last February. And it caught on, despite the fact that it doesn’t do a very good job of explaining the potential consequences of a failure to reach a deal. After all, the spending cuts and tax changes that would kick in on January 1 wouldn’t destroy the economy overnight. They would kick in slowly, and intensify over the course of months. So people are saying that, instead of evoking terror with the name “fiscal cliff,” we should call it the “fiscal slope” or the “fiscal obstacle course."
How about “fiscal waterslide?”
That does sound like fun.
So, how will all of this end?
Nobody really knows. As my colleague Jonathan Chait has written about at length, President Obama has an advantage, because the consequences of the fiscal cliff are so much closer to what he wants than to what the Republicans want. Obama could do nothing between now and January 1, and wind up with a lot more leverage to cut a deal that is closer to his preferred outcome.
Some Republicans are now hinting that they might be willing to budge, accepting higher taxes on the rich in exchange for getting their way on the parts of the deal having to do with entitlement programs like Social Security and Medicare. Just last weekend, Weekly Standard editor William Kristol, a conservative who hates taxes, said, “You know what? It won’t kill the country if we raise taxes a little bit on millionaires."
But if he doesn't get an offer he likes, President Obama could just allow January 1 to come and pass with no deal, and then use his newfound leverage to force the Republicans to accept some higher taxes. Of course, he’d have to ignore a bunch of people yelling at him and stoking fears about economic armageddon.
They could also put the whole thing off for a few more months. In any case, the next few weeks will be filled with a lot of hysteria and grave pronouncements about what will happen on January 1 should a bargain fail to be struck by then.
And … what about Justin and Selena? How will that end?
I have no idea, but I pray it doesn’t involve Grover Norquist.