Originally Posted by Kid A
Markets won't crash the day after the deadline passes. I expect they will react negatively, but the detrimental effects of the tax hikes and the sequester will be gradual—and minimal if they pass a deal soon after. So really the "cliff" metaphor has always been a poor one in that sense. If bargaining drags on well past the deadline, then we reach the oh **** situation.
What Roh/Krugman are saying, though, is that the nature of the problem posed by the "fiscal cliff" is being widely misrepresented. The main narrative seems to be "this 'cliff' is the result of putting off needed deficit reduction measures for too long, and now me must agree on a way to implement them." Hell, both parties are largely sticking somewhat close to that narrative.
They're wrong. The "cliff" really represents an austerity crisis: a sudden implementation of taxes (on everyone) and budget cuts—anti-stimulus that would wreck havoc on a very weak economy. Priorities #1-10 should be strengthening that recovery by, yes, running up further deficits and stimulating further job growth. Taking the bitter medicine of taxes and budget cuts should wait until we are in a stable economy. If we implement them now, even only in part, it will only backfire and make the long term deficits worse (see: Great Britain).
Frankly, the best thing they could do is kick the can down the road even further. But that would be politically toxic, so here we are...
Yep. The solution is more stimulus to create more jobs. Robert Reich agrees.
We don't have a fiscal crisis. We have a jobs crisis. If, in solving this so called "fiscal crisis" we resort to austerity measures, that means fewer jobs, fewer consumers, less spending. The perfect analogy is the "graveyard spiral." This is where a pilot loses his horizon and then tries to correct using his own sense of his position, which has been compromised, instead of reading his instruments. It's what probably happened to JFK, Jr. What the Republicans want to do is instinctively "pull back on the stick" which will tighten the spiral and drive us into the ground. What economists like Krugman are telling us is "read the instruments," we need to level off.
Too bad we are stuck in a political "perfect storm." Nobody can do anything about it because the Right is stuck in an ideological vise. They can't move, and they can't allow anybody else to move either. So, they bring down the whole show. Enjoy.