As members of Congress and the president continue negotiations on the so-called “fiscal cliff,” the rest of the country is left with the challenge of trying to understand what this financial endgame actually means. What exactly are the concrete stakes of the fiscal cliff? And is “fiscal cliff” an appropriate term – or, as some observers argue, is this event more akin to a “fiscal slope” or “fiscal staircase,” with consequences staggered over a period of time?
As economics editor for the The Wall Street Journal, David Wessel spends his days trying to make sense of complicated issues concerning the federal budget, economic living standards, and the ongoing financial crisis. Wessel joins us on Chicago Tonight at 7:00 pm. The following is a transcript of our conversation with the Pulitzer Prize-winning journalist:
How dangerous is the fiscal cliff? I've heard it described as both a cataclysmic event and a manageable problem that may not, in the end, push up interest rates or weaken the dollar.
Congress set this up to force itself to do something about the deficit. It was a suicide pact. It wasn’t supposed to be easy. If we go over the fiscal cliff and stay there for a year or two, we have a recession; that is, tax increases and spending cuts in an already weak economy. If lawmakers fail to reach a deal in December, I think this’ll at least shake up public confidence in government. It’ll shake up the stock market.
[But] if we go over the cliff, it’ll probably be just a matter of weeks and months before the issue is resolved. It’s important to remember: this is an artificial crisis. It can be undone by a vote. The benefit is that lawmakers can force themselves to act. If they can do something, it will lift a weight off the economy. It’ll give us creativity and clarity on the budget.
Uncertainty is holding the economy back. Ordinary people don’t know how much money they’ll have to pay in taxes next year. People dependent on government contracts don’t know if we’ll have sharp cuts next year or not. [A deal] would help to make things clearer. Confidence – and some of these other hard-to-measure factors – do play a role in the economy.
If they don’t reach a deal, this institution [Congress] will suffer another blow. If this crisis doesn’t force them to come to terms on taxes and spending, what will?
What are the major takeaways from the fiscal cliff talks?
The federal budget is big and complicated, and nobody understands it. But I think there are basic building blocks we have to deal with: health care, defense and taxes.
There’s some wasted money in the federal bureaucracy, but that doesn’t really affect the deficit. But if you compromise on these three things, you make progress.
How much money can we spend on defense? Do we have to be the cops of the world? In terms of health care, we have to make the system more efficient. And we have to raise taxes on some people. The reality is that Republicans need to back certain tax increases, and Democrats may have to back certain cuts to Medicare.
What are your thoughts on how the fiscal cliff has been framed and explained in recent weeks by members of the media?
Coverage has gotten better since the campaign because it’s more concrete. We’re not caught up in the ridiculous nature of the campaign, who said what, etc.
I’ve heard some criticism of the term “fiscal cliff.” Some people think it wouldn’t be catastrophic to go over the cliff. Some say it would be beneficial to go over it in the long term. I agree that sometimes the metaphors can get in the way of understanding what’s going on.
How do you get around this – the risk of misrepresenting the issue – in your coverage of the fiscal cliff?
I never use the phrase without defining what it is. I try to explain that [the fallout from going over the cliff] doesn’t have to all happen instantly. The lights of the federal government won’t go off if we go over the cliff.
You published a book earlier this year called Red Ink: Inside the High Stakes Politics of the Federal Budget. If you could add a chapter to this book, based on the economic developments we’ve seen the past few months, what new insights would you have?
I’d like to write about how this ended. How, at the end of 2012, after a very close election, did we manage to find a way to protect the economy from too much austerity, too soon? How does the story end?
This interview has been edited and condensed.