Who’s afraid of the fiscal cliff?

The word from Washington this morning, not surprisingly, is that expectations are low as to reaching an agreement that would avoid the “fiscal cliff” – the combination of automatic spending cuts and tax increases that are scheduled to kick in on 1 January.

I’ll write more about this later, but for now I just want to draw your attention to Jon Chait’s series of posts at New York magazine arguing that most of the punditry on this issue is misguided, and that there’s not much to worry about: a deal will be done, but it will happen after 1 January. His most recent is subtitled “Turns out the House Republicans are still crazy.” (Previous instalments include this, this and this.)

I recommend them partly because Chait (who, as you will quickly find, is a partisan Democrat) is such a good writer, but also because on this issue I think he’s fundamentally right. The argument rests on three legs:

1. The administration’s leverage to get what it wants from the bargaining increases enormously after next Tuesday because the Bush-era tax cuts expire automatically; he can demand concessions in return for supporting an extension to some of them.
2. Although in a normal negotiating scenario that would give the other side a strong incentive to reach agreement earlier, the Republicans aren’t a normal negotiating partner, partly because they have a fetish about voting for tax increases (as distinct from just letting them happen) and partly because they are deeply conflicted about whether they really want to cut government spending.
3. The fiscal cliff itself is not, at least in the short term, going to produce disaster, because the cuts don’t happen overnight – an agreement reached sometime in January would differ very little in its effects from one reached tomorrow.

If anything, I would put the last point more strongly than Chait: I don’t think a modicum of austerity is something to be feared, and I suspect it’s being blown out of proportion by an unholy alliance of Republican propagandists and born-again Keynesians. In particular, I think it would do the American body politic a world of good to discover that deep cuts in military spending can be made (if only for a few days) without the sky falling in.

The doomsayers are perhaps on stronger ground when they argue that going over the fiscal cliff would spook the financial markets, not from its intrinsic effects but from the message it would send about dysfunctional government. But a deal that just reversed the automatic cuts without putting anything in their place would surely send the message that neither side was serious about bringing down the deficit, and that would be even worse – for both the markets and the taxpayers.