Goodbye to the Fiscal Cliff

The analysis of the results of the cliff have fallen mostly into three projections:

The cliff will have no effect on consumer or business spending. People and businesses, particularly rich people, have accepted that taxes will rise right away. Under this theory, those who are forewarned accept their fates without fear or a possible change in the course of their financial activity.

The second and most pessimistic view is that people and businesses have already cut spending. That reality has not shown up in most government or private sector figures about the broader economy, but the bad news is there nonetheless. Within a month or two, unemployment will rise and confidence will plunge. As the Congressional Budget Office has forecast, the economy will spin rapidly into recession in the first quarter of the year.

The most interesting of the three theories is that the fiscal cliff is no cliff at all. The effect of any tax increases or drop in government spending will be spread out for months and months, and any impact will be dissipated. Government spending does not grind to a halt immediately. Federal programs can take months to shut down. The bleeding will be so slow as to be hardly noticed. The bite on businesses and individuals will be so small on a monthly basis that in the first and perhaps second quarters, it barely will be felt. When people and businesses file their taxes at the end of 2013, then the shock of higher payments to the government may finally set in.

When the press has covered a story until its is exhausted, readers and viewers become exhausted, too. The cliff has been on the front pages for months. People and businesses have formed their opinions about the effects. How can we miss it until it goes away?

Douglas A. McIntyre