Committee for a Responsible Federal Budget

No Surprise: Fiscal Cliff Causing A Lot of Uncertainty

We have been warning for a few months now about the potential consequences of the fiscal cliff -- and adding to the debt by averting it all together. As it turns out, the short-term economic consequences may already be occurring, according to a recent Washington Post article.

Defense contractors have slowed hiring. Tax advisers are warning firms not to count on favorite breaks. And hospitals are scouring their books for ways to cut costs...

The uncertainty is already prompting some firms to take action. Many more say they will be forced to contemplate layoffs and other cost-cutting measures long before the end of the year unless the Republican House and the Democratic Senate come up with an alternative path to tame deficits. But with control of the White House and both chambers of Congress in play on Nov. 6, aides say it is impossible to begin mapping a strategy for compromise until they know who wins the election, by how much and on which issues.

That seems to be a good argument for getting moving now on a plan to deal with it. We have already estimated that the cliff would hurt the economy by about two percent of GDP in 2013 and 2014, but that does not say what will happen in 2012 in anticipation of everything happening.

The one commonality between the many comments from the business and policy community in the Post article is that the scariest aspect of the cliff is the lack of any plan that would pass Congress at this point. As Bob Greenstein of the Center on Budget and Policy Priorities commented:

On the one hand, you say: "We’re a functioning country. Somehow, we’re going to work this out." But then you ask: "What’s the scenario for a potential solution?" And you can’t come up with anything that you can see actually passing Congress.

That, of course, does not mean that there isn't the ability to come up with a plan, just that there has not been good-faith negotiations yet. Also, just because the cuts would adversely affect certain groups does not mean that we should permanently avert the cliff without deficit reduction. In order to get our debt under control, interest groups need to recognize that everyone will need to contribute to deficit reduction. But indications that businesses and people across the country are dealing with the cliff already should give an impetus for Congress to negotiate a smart and gradual deficit reduction plan very soon.