Cliff Schmiff

Abstract

Dread of the “fiscal cliff,” widely apparent in public discourse on tax and fiscal policy, rests largely on an illusion: that the contractionary effect of unwinding public debt can be substantially avoided if it is carried out more gradually. In fact, the possibility of fiscal drag inheres in all reduction of public debt. The question is whether it can be mitigated by stepping away from the fiscal cliff and following some other path to public solvency.

While a less painful resolution of our fiscal situation may be possible in theory, the policies floated of late in public pronouncements across the ideological spectrum are more harmful over time than simply falling off the cliff.

Keywords: fiscal cliff, fiscal policy, public debt, government debt