Why the Fiscal Cliff is Called the Fiscal Cliff

If you’re in charge of US monetary policy and trying to accelerate a recovery amid a devastating long-term unemployment problem, you want fiscal policy to either complement your efforts or at least be neutral, not work against you. “Fiscal cliff” is a lot easier than “policies contributing to tighter fiscal policy beginning next year”.

Over at the Financial Times, Cardiff Garcia has a great explanation about who coined the “fiscal cliff” (Ben Bernanke), why it has stuck, and why it’s a dumb name (“If policymakers don’t work out a solution by January 1st, the harm is not immediate. Nor is it irreversible, nor is it even all that perilous at first.”)

Also, according to Rep. Jeb Hensarling of Texas, chairman of the House Republican Conference, “the best time to work on a bipartisan basis is right after an election.” Mitt Romney may actually be useful in this case.

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The reason why it is a “cliff” is because, with the current Congress, once a tax or spending cut goes into effect it will be very, very difficult to reinstate.

The sheer size of the cuts is also such that if you were to look at it on a line chart it would resemble a cliff (most likely where Bernanke got the idea).

I do like the idea of a numerical cap on deductions rather than fighting over this or that deduction. You can always find a sympathetic person who benefits from each particular deduction, but it’s hard to find anyone taking more than $50,000 in total deductions that couldn’t afford to pay a little bit more…

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