What will happen if we go over the fiscal cliff?
That depends on which “fiscal cliff.” The term has been applied to two very different economic events.
Journalists now are calling the “fiscal cliff” what will happen in January if Democrats and Republicans in Washington don’t make a budget deal this month:
• Income tax rates will revert to what they were before President George W. Bush cut them.
• “Sequestration” — the $1.2 trillion (over 10 years) in automatic spending cuts that Congress agreed to as part of last year’s debt-ceiling deal will begin.
• The “temporary” 2-percentage-point reduction in payroll taxes for Social Security and Medicare will expire.
The combination of these tax hikes and spending cuts would raise unemployment back above 9 percent and plunge the economy into recession, the Congressional Budget Office has forecast.
That’s bad. But if the economy falls over this “fiscal cliff,” it’s likely only to sprain an ankle or maybe crack a rib. If the economy goes over the much higher cliff to which the term originally referred, it could break its neck.