The Final Countdown By: Gabriel PotterMBA, AIFA® 2012.12.19
Federal Reserve Chairman Ben Bernanke coined the upcoming scheduled spending cuts and tax hikes as the “Fiscal Cliff”, but some analysts suggest it would be better to call it a “Fiscal Slope”. Compare the Debt Ceiling crisis of summer 2011 to the ongoing Fiscal Cliff negotiations. Both then and now, the impasse between the Democrats and Republicans regarding the necessary combination of increased revenue (achieved with tax rate hikes, or tax deduction limits) and spending cuts threatened serious consequences to the country’s fiscal health. There is, however, a significant difference in the current Fiscal Cliff negotiation: the clock.

Any interested observer can turn on CNN, CNBC, Fox News, and see literal countdown timer that ticks off the days, hours, minutes and seconds remaining to resolve the fiscal cliff impasse. The presence of that countdown clock suggests some sort of immediate harrowing consequence to the country if a deal is not struck.

For the 2011 Debt Ceiling crisis, a countdown timer may actually have been an apt metaphor. The business of government would not have stopped completely if the debt ceiling wasn’t raised, but many government services would have been severely curtailed and many government offices would have been restricted to essential personnel only. (For full details on what a shutdown would have looked like, please see our July 2011 article on the Debt Ceiling debate.) A countdown timer for the 2011 debt ceiling debate was an appropriate comparison.

For the current Fiscal cliff negotiations, the timer is less appropriate. Imagine that the House Republicans cannot make a deal with the Democratically led Senate and White House and we go over the cliff. The impact will be felt only gradually and the most of the consequences will be reversible. For example, imagine a middle income family will have to pay $2000 extra taxes for the year, but that translates to $80 missing from their take home pay each biweekly pay period. Congress and the White house can work after the January 1st deadline to fix the problem and they could even credit households for the additional taxes they paid in the first few pay periods of the year. Any programs that suffered from sequestration delays could be restored.

The countdown timers are on television to install a sense of urgency and fear in viewers, but the direct effects of a failed negotiation will not be immediately absorbed in the economy. (Indirect symbolic effects of a failure in negotiations, including additional mistrust between the key players, might be more instantly damaging.) On the whole, the Fiscal Cliff is a problem that deserves swift resolution, but it does not actually require one.
Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

More about Gabriel Potter
Sign up for our Newsletter
Sign up for our Newsletter