Mental or Fiscal Cliff?

Those of you who occasionally turn on the news might have heard that U.S. policy is headed toward a “fiscal cliff” if Congress and President Obama fail to reach an alternate budget agreement.  For those of you who have been hiding under a cliff since the election, the “fiscal cliff” is simply a set of policies, both tax increases and budgetary cuts, that are probably more severe than most politicians are willing to take the blame for, and could possibly lead to a double-dip recession.  The situation is so severe that The Washington Post has set up an entire Fiscal Cliff Blog dedicated to the matter.

It seems most economists and policy analysts who blog have weighed in on the issue one way or another.  I recommend economist Ed Dolan’s blog, which points us to a reasonably cool background video by Lee Arnold. Arnold doesn’t seem to mention that the Congressional Budget Office projections assume that we go over the fiscal cliff and there are reasonably steep tax increases.  If you watch the video, be sure to check out Dolan’s commentary to put things in perspective.  Dolan also has a nice discussion of what “sustainable” fiscal policy looks like that is cross-posted at the EconoMonitor.

But, writing over at the Cheap Talk blog, Northwestern economist Sandeep Baglia says it won’t happen because the Obama Administration will cave. Why?  Because a fiscal contraction of this magnitude is likely to be significant enough to push the economy back into a recession, and the Administration politically can’t afford another downturn if it wants to do some of the other things that it probably wants to do.

Or probably won’t happen, at least.
UPDATE:  As you knew he would, the indefatigable Ironman at the Political Calculations blog provides a calculator so you can see the effects on you for yourself.