Updated Thursday, July 24, 2014 as of 1:45 PM ET
Practice - Regulatory/Compliance
Cliff Analogy Overstates Immediate Harm to Economy
by: Richard Rubin and Alexander Kowalski
Friday, December 7, 2012
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The spending cuts operate in a similar way because agencies spend money over time, not in lump sums at the beginning of the year.

The Economic Policy Institute, a Washington group that favors policies that benefit workers, prefers the term “fiscal obstacle course” to convey the staggered effects.

Consumers so far are unperturbed by the possibility of tax increases and loss of benefits. The Bloomberg Consumer Comfort Index last week held near a seven-month high. The Thomson Reuters/University of Michigan index of sentiment climbed to a five-year high in November, and the Conference Board’s sentiment index last month reached the highest level since February 2008.

The three measures slumped last year when lawmakers debated whether to raise the nation’s debt ceiling.

Housing Market

A better housing market is feeding into their optimism by boosting household wealth and may make up for some growth lost to fiscal uncertainty next year. Residential investment could contribute as much as 0.6 percentage point to gross domestic product in 2013, according to Joe LaVorgna, chief U.S. economist at Deutsche Bank in New York. Homebuilding probably added 0.3 point to the expansion this year, the first contribution since 2005.

Businesses in the U.S. have begun to reduce investment in anticipation of fiscal restraint. Spending on equipment and software has slowed for three straight quarters. It dropped 2.7 percent from July through September, the first decline since 2009, when the economy was exiting the recession.

Pickup in Demand

A more recent pickup in demand may mean business investment will rebound next year if lawmakers reach a budget deal. Orders for non-defense capital goods excluding aircraft, considered a proxy for future business spending, rose 2.9 percent in October, the most in eight months and following a 0.5 percent decline in September, according to Commerce Department data.

Bernanke was the first prominent official to describe the policy changes scheduled for 2013 as a “fiscal cliff.” He used the phrase on Feb. 29, during a hearing of the House Financial Services Committee, and it became a staple of the lexicon of lawmakers and political commentators.

Bernanke declined to comment on the appropriateness of the terminology. He used the term “fiscal cliff” in his most recent public remarks on Nov. 20.

Senator Mark Begich, an Alaska Democrat, described the “fiscal cliff” as “probably the most-known phrase in politics now.”

Cliff imagery has been a part of U.S. policy discourse for more than 100 years, Stephen Carter wrote in a Bloomberg View column Nov. 29.

‘At the Edge’

“In short, we can safely say that the image of finances hanging at the edge of a cliff or precipice or escarpment goes back a long way,” wrote Carter, a professor at Yale Law School.

The cliff metaphor has created pressure to reach a deal when many of the economic and market effects of inaction would be reversed if Congress reaches an agreement in early 2013, said Stone, whose group advocates policies that benefit low-income households.

“It’s very effective if you in fact can convince people that going past it would be catastrophic,” said Martin Medhurst, a professor of political science at Baylor University in Waco, Texas, who studies political communication. “If it gets to the point where it does go past the deadline, then you could always recalibrate and adopt a different metaphor.”

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