What’s the worst that can happen? As the deadline approaches for the Fiscal Cliff later this month, a lot of people are asking this question. It’s becoming common on both the left and the right to question whether or not we should just “go over” the edge and see what happens.
No matter where it comes from, this is a dumb idea. Let’s examine why.
First, we should see who is calling for an end to negotiations and why. On the left, the most common argument is “let’s just let the Bush tax cuts expire”, as if that is all that happens at the end of the year. That’s simply wrong – what is at stake here are all the tax cuts, including those that affect the middle class, including the 2% “payroll tax holiday” that has put an extra $1,000 per year into the hands of a median household. Plus there is the “sequestration”, or automatic cuts that will certainly cause a huge spike in unemployment and, according to the CBO, put us back into recession.
Don’t forget that this all came from the debt ceiling debacle of August 2011, and that debt ceiling has to be increased again sometime in February. If we can’t agree on the other aspects of the budget, how will Congress get to this round of debt ceiling increase?
There are people who genuinely understand what is at stake who still believe that going “over the cliff” is a good idea. The common argument on the right, expressed clearly by Rush Limaugh, is to “flush Obama out”. Others on the right, including Newt Gingrich and Charles Krauthammer, have similar sentiments. They seem to think that their hand becomes stronger with time.
Where this gets weird is that you’ll find the same argument on the left, too. The two sides are so embedded that they honestly believe their hand gets stronger by allowing the nation to become weaker. As Megan McArdle wrote in “The Daily Beast,” “To win a game of chicken, rip off your own steering wheel and throw it out the window so your opponent knows you can’t turn. But what if the other guy does the same thing?” You both die, of course.
There is a different reasoning coming from many bond dealers, put most eloquently by Peter Schiff, the head of Euro Pacific Capital. The biggest risk is not that “we go over this phony fiscal cliff,” Schiff said in a recent article. “It’s [that] the government cancels the spending cuts, cancels the tax hikes,… [and] instead we end up going over the real fiscal cliff further down the road. “In fact,” he added, “the real fiscal cliff comes when our creditors want their money back and we don’t have it.”
In other words, give everyone a taste of just how bad this is so that they stop screwing around.
All of these reasons, of course, are completely political. That is understandable, given that this is an entirely political problem. The arguments range from a lack of understanding of what the fiscal cliff is about to a lack of appreciation that there is anything real behind it to a deep understanding that reality is woefully lacking in politics as we know it.
That doesn’t mean that we won’t have a terrible dive if we do allow everything to expire, of course. Just that a lot of people think it’ll be a good thing for a variety of (bad) reasons.
If we have learned one thing from Europe lately, it should be that austerity is not the solution to the lingering depression. If we have learned another, it should be that no matter how much respect you have around the world the more you screw around and show that your politics makes it impossible to back your currency with the “full faith and credit” of a sound government you are going to be hammered in the bond market. We may think that the US is above the kind of problems Europe has had, such as a quarter of all Spanish out of work, but that is utterly ridiculous.
What is approaching us is a test. It’s a test of our government first, but as a Democratic-Republic we generally have the government we deserve. Lately, a lot of arguments have been floating that we should allow this government to fail in its most basic obligations just to show up either the “other side” or those wallowing in delusion. All of the reasons given are lousy.
“Going over the fiscal cliff” will cause real pain for many people and make it much harder for us to go forward. Leadership must be found to prevent this – and if it is not, it is hard to imagine there will indeed be leadership for the much worse world of hurt we find ourselves in afterwards.