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Why the "Fiscal Cliff" Is Much Steeper Than You Think

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The Congressional Budget Office reported this week that the economic consequences of the U.S. going over the "fiscal cliff" in 2013 will be more dire than originally thought. Specifically, if $500 billion in tax hikes and spending cuts scheduled to hit in January are not averted, then the country will suffer a substantial recession, with unemployment rising above 9% and a 2.9% contraction in gross domestic product in the first half of 2013.

Predictably, this news has put both political parties into overdrive, and reignited the debate of whether Congress should act quickly, if hastily, to avert near-term disaster at the expense of a ballooning deficit, or whether it should opt for long-term fiscal discipline. There are valid arguments for both points of view. Even if Congress does act to forestall disaster, our debt level is unsustainable and will eventually lead to an economic slowdown anyway.

So what's the right move here? To answer that, we need to take an altogether different factor into consideration: the systemic damage that a prolonged recession will do to the United States economy.

For one thing there are the steep budget cuts which will directly impact workers and businesses that serve them as consumers. For another, if the CBO is right, going over the fiscal cliff will extend the recession by at least two years, if not more. During that period, not only will people lose jobs, but the US will suffer a significant loss in productivity, a sharp decline in worker and business morale, an erosion of its competitive edge on the global stage, and a flight of investment capital out of the country. In the fast-paced and rapidly evolving business world of today, the damage done to our economy by these elements will not just be severe but largely irreversible, which could then erase any gains that we make in the long term through fiscal discipline. Not to mention that decreased productivity, market share, and capital will force many businesses into bankruptcy or at least stall their growth while international competitors fill that void and effectively "take the throne".

Obviously, the fiscal cliff is not one party's fault since both are guilty of taking a hard stance on taxes and spending that have led to this situation. In the end, the only feasible solution will be a compromise. Still, the Republican approach of cutting taxes during a financial crisis and slashing spending at any cost is dangerous in the current scenario. Even though both parties agree that the US government spends too much money and needs to tighten its belt, excessive belt-tightening in a depressed economy with high unemployment will only serve to choke the wind out of us and lead to unrecoverable economic losses.

Reckless action by Congress is neither called for nor smart, but inability to reach a compromise on this important issue, particularly by the Republicans whose ideological intransigence is a big hurdle, will make things worse. While the GOP did offer to resolve this earlier, that was on terms that would have exacerbated the crisis. Fiscal discipline is fine but it must be administered gradually and in a way that does not shatter our fragile economy and the livelihood of Americans today. Anything less would be unpatriotic.


Sanjay Sanghoee is a former banker and the author of two thriller novels. Please visit www.sanghoee.com for more details and to sign up for updates.