Remain Calm: The Sky Will Not Fall if U.S. Hits the ‘Fiscal Cliff’

Steven C. Kyle, an expert in macroeconomics and government policy, and a professor of management at Cornell’s Dyson School of Applied Economics and Management, comments on the possible economic implications of Congress and the President failing to reach a deal before the Jan, 1, 2013 “Fiscal Cliff” deadline.

Kyle says:

“The fiscal cliff isn't an emergency that requires most people to take immediate action; actually it is more of a slope than a cliff.

“If the government cuts spending levels as of Jan. 1 while allowing taxes on the bulk of the population to rise, it will constitute a negative shock whose effects will accumulate through the year to dampen growth. Many commentators have spoken of ‘cuts of half a trillion dollars’ to defense spending and similar cuts to domestic budgets. What they often fail to emphasize is that these cuts would be spread over 10 years, making the effect in any one year far less, and that in the month of January 2013 even smaller.

“There is no explosion or crisis that will occur as was the case with the debt ceiling a couple of summers ago when failure to agree could have resulted in a default of the U.S. government on its debt obligations. Tax increases are more substantial in percentage terms than are spending cuts but are also spread out across the year. Most people have proportional amounts deducted from each paycheck and would not see the entire tax hike all at once.

“Would it be better to solve the problem before January? Sure. It is always better to do it ahead of time than play yet another game of chicken with our nation's economy. But would the economy by substantially damaged if we didn’t get it done until the end of January? No.

“We should all hope our leaders in Washington get this right and that they consider it to be their first order of business, but if getting it right means doing it on Jan. 15 instead of Dec. 15, there is no need to place a call to Chicken Little. The sky will not fall.”

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