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How We Got To The Edge Of The Fiscal Cliff


While the election approaches, less than a month away now, many politicians and economists look beyond November 6th to an apocalyptically named crisis that looms at the end of the year.

UNIDENTIFIED MAN #1: Fiscal cliff.


UNIDENTIFIED MAN #2: Fiscal cliff.

UNIDENTIFIED MAN #3: Fiscal cliff.

UNIDENTIFIED MAN #4: Fiscal cliff.

CONAN: Congress resolved the last fiscal crisis with a deal that kicked the can down the road to January, and it built a painful kick in designed to spur agreement on deficit reduction. Barring agreement, there will be deep, automatic, across-the-board cuts to defense and domestic spending, and agreement does not look probably, at least right now. At the same time, the Bush-era tax cuts are set to expire, and economists warn that the combination would likely trigger another recession.

If you have questions about the fiscal cliff or what it means for you, give us a call: 800-989-8255. Email us: You can also join the conversation on our website. That's at Click on TALK OF THE NATION. David Wessel writes the Capital column for The Wall Street Journal. He's a regular contributor to NPR's MORNING EDITION and joins us from Studio 3A in Washington. Nice to have you back.

DAVID WESSEL: You're welcome. Good to be here.

CONAN: And that congressional deal, that was the resolution of the crisis and set up an even worse one.

WESSEL: That's right. I mean, basically what Congress said was, OK, we have to do something to force ourselves to do more deficit reduction. They did a trillion dollars over 10 years last August. They wanted to do another 1.2 trillion. So they took a gun. They put bullets in it. They pointed it at the heart of the U.S. economy, and they said we're going to set the trigger to go off automatically unless we come up with some alternative way to reduce the deficit. Well, here we are a year later, approaching the end of the year. The trigger is set to go off and, as you point out, there's very little apparent momentum to doing - finding the alternative way to reduce the deficit.

CONAN: Everybody seems to be waiting for what happens November 6 to see how the cards are going to play out, not in the lame-duck session of Congress, which would have to reach a resolution but that within the next Congress coming in.

WESSEL: Well, I'm not quite sure about that. I think that everybody is waiting for the election. Congress is basically going home, so nothing can happen until after then. If Gov. Romney wins in November, I think the most likely thing is that Congress votes to call the whole thing off, extend the Bush tax cuts, suspend those spending cuts and give the new president a chance to come up with his own budget plan. But if President Obama is re-elected, there will be an effort - both by the White House and by a number of people on both sides of the - on the Senate - to use the lame duck to put in place a framework that will allow them to call off the fiscal cliff, if that metaphor is right, but actually make some progress on reducing the deficit over the long term.

CONAN: You wrote a piece lately that said there were three options people were talking about. The bungee jump, that's - you mentioned first - the Republican sweep the presidency, the House and the Senate. And then they step away from the fiscal cliff and give new president Romney a chance to do that. There was also what you called the hard stop. What's that?

WESSEL: Well, that's where they, I mean, I borrowed this from Goldman Sachs. I'm not taking credit for these metaphors, although this is a metaphor writer's dream, this whole thing. You know, some people are talking about it's not the fiscal cliff. It's the fiscal slope or the fiscal obstacle course. But to get back (unintelligible), the hard stop is basically we get the problem. We get an abrupt increase in taxes, an abrupt cut in spending. It's huge, and it would almost surely put us into recession if it stays in place.

CONAN: So then there's the third option, the skydive. In other words, step off the fiscal cliff.

WESSEL: Right. Right. And I think that the thinking is - I mean, what I have - trouble with some of these scenarios is that they pretend that we go over the cliff, we jump off the cliff, whatever you want to say, and we - and nothing happens.

It's highly like - two things are - one or two thing is like - are likely, it seems to me. One is we get closer and closer to the cliff, my guess is the markets are not so complacent as they have been. And there'll be some big move in the stock market or the bond market or the dollar or something, and that'll get members of Congress to get off their hard-bargaining positions and cut a deal. Or we go over the cliff, and then in the days or weeks after January 1st, they put something together to - if you can drive the car back up over the - off the cliff or something. I'm lost in the metaphor there.

CONAN: It's easy to get lost in metaphors. Those darn writers, they have control over them when they have - don't have the same kind of deadlines we do in live radio. But, David Wessell, of The Wall Street Journal, as you look at these different prospects, well, we're going to ask the listeners to weigh in on the conversation, 800-989-8255. Email us: Gregory is on the line with us from Santa Rosa, California.

GREGORY: Hi, yeah. I think I'll call it a fiscal wall instead of a cliff because I think it's more like the wall between the NASCAR track and the grandstand. And I'm in the grandstand, and I like that wall. I think the plan is good, compromise. Nobody likes it, but it was a good compromise. And if they have to go into debt, it's going to be good for us. I don't think it's a gun at the heart. So why - tell us why you think it's a gun aimed at the heart? Because I think it's good across the board cuts.

WESSEL: Well, because cutting spending across the board is mindless. It doesn't allow the Congress to set priorities and say, we want to spend more on education or less in education, more in defense or less in defense. The cuts are very big, probably much bigger than the economy, which is pretty fragile, can absorb. And the tax increases are not just on rich people. It's on almost everybody. So here we have this economy that's perking along at a very slow growth rate, so slow that the unemployment rate probably isn't going to fall much further anytime soon. And we'll have a big cut in spending, and it'll be across the board mindless. It won't be phased in, and there won't be any priority setting. So it doesn't seem like the best way to do it.

Congress did this because they thought it was so horrible, would force them to do something better. Now, they're rethinking that strategy. Maybe that wasn't so smart.


GREGORY: Yeah. Obviously, the - they did it as a compromise, and a good compromise is one that nobody likes, but...

WESSEL: Well, I don't agree. I think...

GREGORY: When are the Republicans ever going to vote for any kind of tax increase? They're not. So this is the best we can get.

WESSEL: I think that the - there are number of people I've talked to in Congress that say, if we do this again, we want the failsafe to be something that we can actually live with. Like there's some talk, if they do another one of these things where they promised to do something and say, if we fail, we'll put something into legislation that'll come in. They're saying, maybe we should have done something more like the Bowles-Simpson deficit reduction plan, that commission that the president appointed, something that would be more palatable, more phased-in and more rational.

CONAN: Gregory, I wanted to get to somebody who I think agrees with you in just a minute, but thanks very much for the phone call. And, David Wessel, the horrible parts were put in - these big budget cuts would go into defense, which was supposed to make Republicans recoil and say, well, we'll make a deal. And they would also go into a lot of the treasured programs, domestic spending programs, that the Democrats treasure. That was supposed to be their incentive to come to some sort of agreement. But it was former Democratic Party chair, Howard Dean, who was on our program last month. We asked him about the changes he anticipated if President Obama was re-elected.


HOWARD DEAN: And I think we'll go over the fiscal cliff, which I think is a good thing. It's not a great thing, but it's certainly better than all the alternatives. That will start - it will begin to - it will raise tax revenues and start to balance the budget as we should. It will also cut some things. I hate the idea of cutting, but we're all going to have to give something. We're going to have to deal with the deficit. That will get dealt with by the fiscal cliff.

The Republicans don't like it. But, you know, they don't have an alternative that's reasonable. They just like to cut the hell out of all the millionaires' taxes and raise the middle-class taxes by $2,000 to pay for it. And I don't think that's much of a solution. So, you know, we're going to have gridlock, but the president is pretty experienced. And sooner and later, the Republicans are going to want something positive. And when they decide what that is, then we can start to negotiate with them.

CONAN: Howard Dean, a former Democratic party chair, talking to us from the Democratic convention. Of course, he's assuming President Obama, in that scenario, gets re-elected. And he concedes, yes, it would cause a recession, but he says, a relatively mild one, and we'll be in better shape afterwards.

WESSEL: I think this is people staking out bargaining positions. A number of people in Democratic left are trying to stiffen President Obama's spine. And they want the Republicans to believe that this time, President Obama is not going to fold. That he will, if you're not reasonable, take us over the cliff.

So I discount all these things as posturing. I'm not saying that it won't happen. But I think if we go over the cliff, it will be because of miscalculations by Republicans and Democrats, not because of the deliberate strategy.

CONAN: Let's go next to - this is - let's go to - if I remember how to do this - Steven. Steven with us from Tulsa.

STEVEN: Yeah. Hello. Thanks for taking my call.

CONAN: Sure.

STEVEN: My question really comes into play with the value of the dollar in my wallet and how that value changes based on the market and the economy going over that cliff. And maybe if you could just speak to - maybe everybody doesn't realize that the value of the dollar changes because we don't have anything backing that dollar bill. Maybe speak to something about that effect.

CONAN: David Wessel, what would be the effect in the value of the dollar?

WESSEL: Well, I think it's a hard question to answer. We are running a fiscal policy that is wildly regarded as unsustainable. We have, if you project out, debt that will explode by any measure, yet the U.S. government is able to borrow at extraordinarily low interest rates. And the value of the U.S. dollar, measured against other currencies, has not fallen. So it's not because the rest of the world thinks that we know what we're doing. It's because we are, if you will, the world's tallest midget. Everybody else looks even worse. The Japanese have more debt than we do, relative to the size of their economy, and a shrinking population. And the Europeans, well, they can't even agree if they want to continue to share the same currency. So people have very little confidence in them. So for the time being, I think we've been lucky.

When we survey investors at The Wall Street Journal and we ask them, what do you think would happen to the value of the dollar and to the stock market if Congress actually found a way to compromise and do a significant deficit reduction deal? They mostly say, it would be good for the stock market and good for the value of the dollar. Well, that implies, to me anyways, if they continue to - if gridlock continues, if this thing is tapered over and they, maybe, call off the spending cuts, but they do it with some kind of phony agreement - another commission, no penalties for failing, then I think there's a risk, although who knows, that the stock market falls and so does the value of the dollar.

CONAN: David Wessel, economics editor at The Wall Street Journal, writes the "Capital" column for that newspaper. You also hear him regularly on NPR's MORNING EDITION. You're listening to TALK OF THE NATION, coming to you from NPR News. And John's on the line, calling from Pittsburgh.

JOHN #1: Hello, David Wessel. I enjoy your column.

WESSEL: Thank you.

#1: David, beyond all these other things you were talking about today on TALK OF THE NATION, what about our credit rating? That's the first thing that comes to my mind, you know, with regards to what we have to do while we're reaching this fiscal cliff. I mean, this is indebtedness, you know, that's going to be rated throughout the world. You know, the whole world is watching this part of it.

WESSEL: Right. It's a good question. So after the last confrontation that was pretty unpleasant over the debt ceiling in August 2011, one of the credit rating agencies stripped the U.S. of its gilt-edge AAA rating. And they said it wasn't because they doubted America had the money to pay its debts, but they doubted the capacity of the political system to function. My guess is, if we have another confrontation like this, the other rating agency will do the same thing.

But it is worth remembering that the rating of the - the U.S. lost its AAA rating, but we're still borrowing very, very cheaply. In my mind, the problem is not the credit rating. The problem is the problem. That if you look out over the next decade, even if the economy is healthy again, we have made promises to make benefit payments and other spending that far exceed what the tax code will bring in. I wrote about this in a recent little book I did called, "Red Ink." And the problem is that people around the world are beginning to wonder, does our democracy function? Can the leaders of our country, the Republicans and Democrats in Congress and the White House, actually find a way before we get to some point of crisis to bring those spending and revenue lines a little closer together?

CONAN: And those - and, John, thanks very much for the call. Those questions might be answered, in one sense, in the event that Republican sweep that you speculated about. But if President Obama gets re-elected - and let's speculate the Democrats hold on to control of the Senate, but Republicans hold on to control of the House - then questions about whether the United States government is going to be able to decide anything or make a coherent policy, those questions seem likely to persist.

WESSEL: Absolutely. It seems to me that from where we stand right now, looking at the polls, it's unlikely that one party will dominate both houses of Congress and the White House. That could change it between now and then, so I'm not a political forecaster. What will happen if President Obama wins and we have a Congress that looks much like the one we do now is, I suspect, that the White House and the Senate, where there does seemed to be a core of people of both parties who want to do something, will put something together that involves raising taxes and cutting spending on Medicare and other benefits.

Then it will be really interesting to see what happens in the House. It can only pass if some Republicans break with the orthodox and vote to raise taxes, and some Democrats vote to cut Medicare spending. If everybody holds there - maintains their positions, it will fail. And that's really the biggest question right now, what would do the House do after the election in the scenario you described?

CONAN: Let's go to Joe, and Joe is on the line with us from Tampa.

JOE: Yeah. My question is if we do go over the cliff, I suspect that some sort of, you know, majority, you know, wholesale change in Congress. People might vindictively vote to go over the cliff at the end of year. How soon could we recover from that and put in an action things to recover from that fall?

WESSEL: Right. It's a good question. So first of all, they don't have to vote to go over the cliff. The cliff - we go over the cliff if they do nothing. Secondly, the White House, the Treasury have a lot of flexibility, in fact, about how they implement this thing. The Treasury does not have to immediately change the withholding tables and take more income tax out of our paychecks. And the White House budget office doesn't have to bring down the cleaver right away in the first couple of weeks. So if they're close to a deal, I suspect they'll find some way to soften the blow, and it won't do much harm in the plumbing sense.

What - but I think a bigger concern, in my mind, is that if it looks like - and you know these things always go down to the wire - they're not going to get a deal, you might get some pretty - a lot of turmoil in the financial markets that could really shake the foundations of the economy. And you certainly would further erode what little trust the Americans have left in the capacity of their leaders to govern.

CONAN: And when do we have the next deadline upon which we're going to have to raise the debt ceiling?

WESSEL: Well, we'll probably hit the federal debt ceiling at the end of this year, but the Treasury can do a lot of maneuvering. So the actual drop-dead date - the Treasury is being quiet about this - is probably not until February or March. It depends, of course, on how tax revenues do between now and then. But that's another flashpoint, you're right.

CONAN: Let's get one more caller in, John. John, we just have a few seconds. You're calling from Kansas City.

JOHN #2: Yes. My question for your guest is - I mean, it's granted been a long time since I had econ, but I was always thought that when government cuts spending during tough economic times, the result is economic chaos. Do some politicians and the economists no longer believe this?

WESSEL: Most people believe - most economists believe that. There are those who believe that if we could tighten our fiscal belt, reduce the uncertainty that then the economy would rebound and it could be expansionary. But that's clearly not the majority view.

CONAN: Thanks very much. We appreciate your getting that question down to time. And, David Wessel, thanks as always for your time.

WESSEL: You're welcome.

CONAN: Tomorrow, it's TALK OF THE NATION: SCIENCE FRIDAY. Ira Flatow will be here. It's the TALK OF THE NATION from NPR News. I'm Neal Conan, today, in Columbus, Ohio. Transcript provided by NPR, Copyright NPR.

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