Fiscal cliffhanging causes national nervous breakdown

Economists are increasingly worried about the possible psychological scars caused by the fiscal cliff, not just the cash flow issues that Democrats and Republicans must reconcile before the start of next year.

By The Fiscal Times Nov 28, 2012 10:26AM
By Josh BoakThe Fiscal Times logo

Paging Dr. Freud! The fiscal cliff has the country in need of some serious therapy—and maybe a Xanax or two.

Many economists are warning about the possible psychological scars left by the cliff, not the relatively straightforward cash flow issues that Democrats and Republicans must reconcile before the start of next year.

Beneath the debate about potential tax hikes and spending cuts, there lurks fear, paralysis, wild optimism and basic questions of trust. The country already views government leaders with skepticism, a feeling that could become even more pronounced if the fiscal cliff talks fail.

“Much like the finale in some kind of horror movie, you know something big is about to happen and are just waiting to see what,” said Stanford University economics professor Nick Bloom.

The game inside the White House negotiations involves tough budgetary math. But for the investors and consumers without a seat at the table, it is a matter of debilitating suspense. Stocks rally on canned statements by congressional leaders that sound positive. Upper-income Americans spend less in anticipation of higher taxes. It’s open speculated whether film legend George Lucas sold-off the Star Wars franchise to avoid higher taxes—and which other billionaires might follow suit.

More from The Fiscal Times:
Along with two other economists, Bloom developed the policy uncertainty index to gauge the financial impact of escalating political tensions. The daily index has steadily climbed over the previous three months—dipping only after House Speaker John Boehner, R-Ohio, and other congressional leaders emerged from the White House on Nov. 16 to call the initial discussions with President Obama “constructive.”

The index currently stands at an elevated 180, its increase tracking with alarmist quotes from CEOs about the cliff and a slowdown in business investment. But that reading remains below the critical 230 level reached last year during the debt ceiling negotiations, when the government nearly defaulted and economists actively warned of an oncoming recession.

Surprisingly, Americans care more about federal spreadsheets than scandalous bed sheets. The fiscal cliff has generated more interest than the juicy extramarital affair involving former CIA director and retired Army Gen. David Petraeus, according to a survey by the Pew Research Center for the People & the Press.

As the details of any bargain get sorted out, some of the usual partisan bile will start pumping. Republicans have historically resisted the tax increases being pushed by Democrats, who in turn oppose the dramatic overhaul of entitlement spending that would likely be part of any deal. The celebrating over friendly tones will give way to sharp doubts, which should take stocks on a volatile ride.

“Despite last week’s kumbaya moment, I’m still expecting to see brinksmanship, posturing, statements to keep the base intact, I expect to see some real conflict and the market is not going to like that,” said Jerry Webman, chief economist for Oppenheimer Funds.

Administration and congressional officials are deeply aware about the role played by animal spirits in the economy. Alan Krueger, the president’s top economics adviser, recently voiced his concerns about the breach of public trust if negotiations disappoint.

“What’s to me much more worrisome is the psychological effects of falling off of the cliff in a number of respects,” Krueger told the Economic Club of Washington. “It would mean to many people that the government is not there to solve the problems it was meant to solve.”

The challenge is that these psychological responses approach the limits of data-driven economics. Consumer confidence is at a five-year high of 82.7 according to a University of Michigan index, despite all the understandable carping about uncertainty.

Swarthmore College professor Barry Schwartz recently proposed that Obama create his own “Council of Psychological Advisers.” This group of PhDs would complement the existing council of economists led by Krueger, helping the president to think through how government policies impact behavior.

“The recent financial crisis and its persistent aftermath make it clear that ignoring the real psychology of ‘irrational’ enthusiasm (or pessimism) can be perilous,” Schwartz wrote this month in The Atlantic.  “This is not to say that macroeconomic variables don't matter and that the behavior of the economy is completely driven by the psychology of participants. Of course macroeconomic variables matter. But they are not, and never have been all that matters.”

But a major part of the fiscal cliff is, in fact, the result of a psychological trick by policymakers. When the bipartisan super committee was unable to agree on spending reductions last year, they set into motion the budget sequestration that will slash $109 billion for Defense and domestic expenditures next year.

Because Congress has a short-term incentive to keep splurging, it created a cliff as a mechanism to curtail the growth of a national debt that now tops $16 trillion. Obama and lawmakers were lashing themselves to the mast just like the mythical character Ulyssess did in order to hear the mythical sirens.

“They've basically said, we're going to force ourselves to do the responsible and right thing by setting up a cliff,” Shankar Vedantam, author of “The Hidden Brain,” recently explained on NPR. “And the cliff is so bad, and its consequences are going to be so detrimental, that it's going to force us to get our house in order. So essentially, what the cliff does is it makes the long-term challenge salient in the short-term. It puts a looming catastrophe right in front of us and says, this is going to get everyone's attention to sit down and focus.”

But even if the cliff succeeds in imposing discipline, any deal is unlikely to instantly produce much certainty—one of the most important psychological salves that the government could offer.

“Frankly, I think the markets have this wrong,” said Greg Valliere, chief political strategist for Potomac Research. “A deal around Dec. 21 probably would be an agreement in principle, with a commitment to fill in the blanks during the first quarter.  So there potentially will be another three months of uncertainty in 2013.  So the good news may be that we won’t plunge over the cliff in early January; the bad news may be still more months without clarity.  If you believe, as most economists do, that businesses aren’t spending or hiring because of all the uncertainty, this scenario is no prize.”

In other words, politicians don’t just have the mission of talking the government off the cliff. They also just might need to talk the nation off the ledge.

Josh Boak is a National Correspondent at The Fiscal Times. Subscribe to The Fiscal Times' FREE newsletter.



31Comments
Nov 30, 2012 5:25PM
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Boehner, we the Democrats, and million of conscientious Republican, and Independents will remember you for ever as the indolent persistent blocker of progress for our country, and we will work hard in the next elections in 2014, to kick you out of the House of Representatives. We will pursue this task with all our heart. Our prime future agenda is to consolidate our efforts to get you fast ejected in the next elections out of a job you did not know how to do efficiently, you did not earned it, and you do not deserved it as an American! We will make you invisible by jerking you out to never return because have done so much damaged to the American people, you destroyed  our credit ratings during the Budget Ceiling discussions  by so much indolent opposition against the president Obama. Unfortunately, for the people of America your negative actions quickly ricochet against the middle class, stopping their opportunity for job creations, better economics future, and less poverty. We still do not understand, and cannot mentally accept a man's in your position to work for America, to be so weak and wrong leading this mass of incoherent Tea Party nuts, and Republican members put there by the people to supposedly work for the people benefits, and for the people gains only, and not for monetary growth, and big publicity names in the House of Representatives. You made yourself a detestable inhuman, with no bipartisan abilities at all. We deeply feel sick just by listening to your bully unaccomplished voice always commanding nothing but despair, no jobs, no presidential Bills passed, only future poverty, and anti -health opposition for the citizens. You need to be put out of your job quickly to save America, and we can hardly wait for the next elections to do it! You and all of you have put us through misery, poverty, and no jobs, you have discredited our USA credit ratings by not wanting to increase the Debt Ceiling, but you kissed the rear of Bush, and increased the debt ceiling many times with no scruples or hesitation, it was because you adore this Republican man of poor and devastating presidential performance as worthless and reckless to be for ever remembered, just like yours!

Nov 30, 2012 3:40PM
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Seems like going over the cliff would decrease spending and increase revenue isn't that exactly what we need to do. Seems like the U.S. is going to learn what "auseterity" is one way or the other and no one is going to be happy about it.
Nov 30, 2012 2:14PM
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OBAMA WANTS ALL TAXES RAISED AND ANOTHER STIMULUS! THIS IS WHAT YOU DEMOS

AND LIBOS VOTED FOR? HE'S CUTTING MEDICARE WHICH HE SAID HE'S SAVE! HE'S

CUTTING MILITARY AFTER WE KNOW BENGHAZI WAS A TERRORIST ATTACK AND IT WAS

ALL A COVER UP AND LIE AND 4 AMERICANS DEAD AND HE JUST WANTED TO SAVE HIS

RE-ELECTION! THE DEMOS ARE ALL SOCIALIST LIBERALS NOW! THEY ARE OFFERING

NOTHING TO CUT THE DEBT AND HOLD TAXES DOWN! THEY WANT ALL TAXES RAISE!

WHERE IS THEIR PLAN? NONE OF THEM COULD ANSWER THAT QUESTION! PELOSI?

REID? KERRY? OBAMA HIMSELF! WAIT TIL ALL HIS ENERGY REGULATIONS AND TAXES

WITH OBAMA CARE AND CUTS AND SERVICES AND RATE HIKES KICK IN! HIGHER FOOD

ENERGY GAS EVERYTHING WILL SKYROCKET! THIS COUNTRY HAS A SOCIALIST IN CHARGE! HE IS HELLBENT ON DESTROYING THE REAL AMERICA THAT HE HATES!

Nov 29, 2012 5:38PM
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I've seen a lot worse than the so called fiscal cliff in 60 plus years of living. I'm not concerned and here's why. Unlike the government, my wife and I live on a budget. Included in that budget is something called discretionary income. It's real simple, you take money from my pocket and I'll take it from someone else's pocket. One less trip to the restaurant and the movie theatre every month. Goodbye Sirius radio and the magazines we get and never read. I'll be downgrading my service with Time Warner and TMobile if necessary. Sorry Ford Motor Company, but I'll be driving our 2 vehicles for a couple more years. When all of the above are crying for customers, I'll take the discounts you'll be offering to get me back.

 I've been playing the game a long time and I have a lot more to worry about than this speed bump.

Nov 29, 2012 9:07AM
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Most people who post in here must be rich.

 

If you make less then 250K and like to donate then by all means raise your hand and let that tax go up for you.

 

We are screwed already by the government in taxes. If we pay more tax, all it means is that we are digging a deeper hole for ourselves, especially the middle class. The government will just go and waste the additional tax money on the wealthy and on something else.

 

Let tax break expire on the wealthy and cut down on wasteful spending. Stop playing politics and use common sense to drive the country forward.

 

 

Nov 28, 2012 8:59PM
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This fiscal cliff talk is BS.  If all of these consequences of not reaching a deal happened now, it would be a good thing.  Taxes should go up for everyone.  I'm not just talking about the wealthy.  We should stop giving tax refunds to people who do not pay anything in taxes.  many of those people are better off than the working poor.  If you want to give them something, give them something that is not cash right out of the mouths of the working poor into the hands of the people who are working under the table or on drugs.  You should have to take drugs tests to get tax refunds you didn't earn.   Then there's the payroll tax increase:  that is actually stealing from Social Security and that should never have started, so it should be stopped immediately.  A lot of people think that money is coming from the federal budget, but it isn't.  It is a reduction in the Social Security deferral which is coming out the retirement account from people who have been counting on it.  Why should a guy making $500 thousand a year get a reduction of his Social Security deferral?  You all ought to know what you are voting for before you vote.
Nov 28, 2012 8:44PM
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This article probably just increased the wealth of Big Pharma ten fold.   They can employ a few physchiatrists to "invent" two new diseases.   One might be called "pre fiscal cliff syndrome" and the other "post fiscal cliff syndrom." Most common symptoms are breathing and stinkying at least once a day.   Now, once the diseases are "found" and named, Big Pharma, the legal drug dealers can employ a few FDA (Future Destruction of America) scientists to cook up a new concoction and put it in easy to take pill form.  Now, the legal drug dealers can employ a few "celebrities" to puke "ask your doctor...." and Big Pharma's pockets will swell with revenue!!!  All they gotta do now is give doctors a kickback to push it and give congress a few million to waste. Do you have the symptoms?

Nov 28, 2012 8:28PM
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With all the wailing about tax increases and spending cuts it's obvious to me that the American people have no intention of ever fully paying back the money they have borrowed from other peoples and from each other. The real intent is to default on the debt via one means or another. Cutting benefits that we've all paid for through payroll deductions - Social security and Medicare for example - is a form of default. Inflating the dollar through expansion of the money supply (Quantitative Easing) is another form of default as the United states pays China and others with cheap dollars. What kind of people are we???? Shameful I'd say. 
Nov 28, 2012 8:26PM
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It is not causing me any anxiety at all!! In fact, I welcome the cliff.  Congress has been speeding toward it for years.  Voters have kept putting them back in office for years!! I am laughing!!! We are doomed but they won't go over the cliff!! In the last seconds of the race, they will swerve and then boldly proclaim "look what we did!!!  We averted the cliff for ya'll. Put us back in office again, ****hes."  (You won't hear "dumbashes" unless the mic is advertently left open.)   They will holler about how gubymint may have to shut down, but it won't.  It Should shut down!  When congress is is session, they are wasting money.  Pretzeldint in office, AF 1 in air!  LMAO
Nov 28, 2012 8:24PM
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This whole thing is bs.  If we fall off the fiscal cliff, will the world end?  Will we be taken over by some other country?  Will people start falling over dead?  No. (Though some may commit suicide.)  The average person will survive and adapt.  America may become a second class country.  People may have to start taking care of themselves instead of depending on others to do it for them.  (High time to if you ask me!)  There may be more violence, but then again we have plenty of violence every day anyway. 

We did this to ourselves, but we're just to stupid/selfish to admit it. 

Nov 28, 2012 7:59PM
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What are we...a bunch of crying babies??? The media's incessant noise about the so-called fiscal cliff is obnoxious. Grown people deal with problems in a mature fashion. Apparently, Americans are such babies they can't tolerate even the mildest of medicine. It's clear that, in order to get control of our national debt, we must have a combination of tax increases + spending cuts. Why all the hand wringing now? Why is "now" never a good time to raise taxes and cut spending??? For all we know "tomorrow" maybe an even worse time. It likely will, so we may as well bite the bullet now. 
Nov 28, 2012 7:49PM
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When you are $17 trillion in debt (and it may be a lot higher), and you have little or no means of paying it back, and the debt is accelerating, you have to be insane to think you are no sitting on a keg of dynamite that will blow you into Kingdom Come. If debt is so meaningless why not just hand out money to everybody????

Nov 28, 2012 7:45PM
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If we confiscated 3/4 of the wealth of the Forbes 400 they would still be wealthy beyond your dreams, and it would amount to $800 billion (more or less), enough to cure our infrastructure problems, house all the homeless, and feed everyone in poverty in the USA for quite some time.  We could also tax them more, and get another $30-$50 billion a year.  Eliminate Social Security and Medicare benefits for anyone with more than $75 Million in net worth.

There is no excuse for homelessness and near-starvation in the USA.  Cut the Defense+(so-called) Intelligence budget by another $100 Billion/year (we would still be spending far more than China, or anyone else, on Defense and Intellligence--both areas are way out of control).

Fire 15% of the highest paid government workers in the states and federal government and limit police and firefighter overtime to a maximum of 20% over base pay.  Make U.S. Congressmen buy their medical insurance through Medicare plans.

Raise Social Security early retirement age to 63, and full retirement age to 67, (unless laid off after age 60, with inability to find a new job paying at least 3/4 of prior pay).  If laid off through no fault after age 60, the company has to pay supplemental unemployment until age 62.  Use a progressive benefit system to encourage age 67 retirement, and continue the current incentives to age 70.

Those are a few ideas to get some additional revenue and lower the deficit, while making Social Security and Medicare more solvent.



Nov 28, 2012 7:34PM
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Go "over the cliff", who cares? This is all a fiasco. We are 16 trillion in the hole. Closer to 50 trillion in the hole if we want to count the "spent "  Social Security money.  Even if they do cut a deal, we will only slow very little the decline of debt. The country is screwed. Take that to the bank. Or maybe try tonights Powerball.

 

Nov 28, 2012 7:26PM
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So like we've been saying for weeks,  the market is going to rise and fall depending on which politician pulls his head out and speaks.  I wonder if the congressional pages have speed dials to their etrade accounts?  For the last year, the market was whipsawed by Fed leaks.  For the next year, it will be Congressional leaks.  But they can't insider trade anymore.....right!  I'd like for them all to be sequestered without cellphones until they have a deal.

 

The fiscal cliff means nothing.  Just as they created it, they can undo it or postpone it.  It isn't like an asteroid hurdling towards Earth.  It's one vote away from being gone.  If we go over the cliff, it's because they always planned to go over it.

 

Most likely they will kick the can......again and work on it next year.  In the meantime, it's going to go up and down like a yo-yo and those that are connected are going to make a bundle.

 

 

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ROFL

 

Hmmm let's see reality we have a $2 trillion dollar deficit a year and we owe $16 trillion dollars

 

They are trying to cut $1 trillion over ten years -- that is $100 billion a year

 

OK $2 trillion minus $100 billion is $1.9 trillion deficit a year ans we owe $16 trillion

 

EVEN WITH THE DEAL

 

1 year down the road we will owe $17.9 trillion

2 years down the road we will owe $20 trillion as the deficit will increase to $2.1 trillion

3 years down the road we will owe $22.2 trillion as the deficit will increase to $2.2 trillion

4 years down the road we will owe $24.4 trillion as the deficit will increase to $2.4 trillion

5 years down the road we will owe $28 trillion as the deficit will increase to $3.6 trillion

6 years down the road we will owe $34 trillion as the deficit will increase to $6 trillion a year

     as people lose faith in America ever paying off it's debt and our interest rates sky rocket.

7 years down the road we will owe $46 trillion as the deficit increase to $12 trillion

8 years down the road the US is no more we have become bankrupt and Israelis own the whole country.

 

 

 

 

Nov 28, 2012 6:30PM
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It still remains, we are NOT under taxed, the government overspends.......criminally overspends.

 

Nov 28, 2012 5:49PM
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It seems that this time around, just like the last, all the talk is about taxes.  Where is all the discussion about spending cuts?  Entitlement reform?  Everyone and their brother is demanding that the Repubs cave and allow some tax increases.  And yet no one is demanding that Obama and the Dems cave and allow some spending cuts.

Give Obama exactly what he wants and the fed gov gets another $100 billion in revenue. Woo-friggin-hoo.  We are running a trillion dollar deficit, where is the other $900 billion going to come from if we aren't willing to make significant spending cuts?

Tax revenues are about the same now that they were in 2007, and yet our gov is spending a trillion bucks more now than they did then.  Truth be told, we don't have a revenue problem, we have a spending problem.  And until our gov proves they can be good stewards of the tax dollars they already get, it doesn't make sense to give them even more money.

Nov 28, 2012 5:14PM
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Not really. If they just sat there and waited for us to riot and push them all out to sea in the middle of Winter and then go reset the economy without extreme wealth or poverty, then it wouldn't be good for media, would it? There's a really good article about a working couple that can't make it out of the homeless shelter. Everyday they achieve far greater success than every rich person everywhere... they survive against the odds. The clock of inevitability ticks away. The Fiscal Cliff gets fixed in only one way- take all the excess wealth and recover jobs with it. Those recovered jobs restore balanced economy and both revenue and currency flows. That creates new opportunities. New opportunities pick up where we left off and restores prosperity based on effort, not paper pushing.

Learn the word: miasma, and what deranged minds of wealth think about as solutions to the pestilence of regular people. Regular people however, are responsible for 100% of Mankind's Existence. Stick your hands out traders... imagine your life in one and all the money on Earth in the other. Choose. If you looked twice at the cash in hand, you can't stay here. You have to go away, but... where do you go once you've screwed the whole world?

Close the banks. End the Federal Reserve. Get RID of Wall Street. Reform Laws until anyone can recite them all. Abolish Law Biz. Guess what? We purge 99% of corruption when we do. If you can't imagine just being happy with Freedom, Life, Liberty, the Pursuit of Happiness and a Respect for your Fellow Man without Exceptions... YOU HAVE TO LEAVE. Majority rules.

Nov 28, 2012 5:08PM
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I am guessing the deal is already done.  The rest is grandstanding.  Both sides have to look at their campain donors and hard core supporters and say we only moved on these issues in the most dire circumstances.  Helps save face with the voters in their ridings as well.  Those in office are the direct servants of those who hold the real power and those people have more to lose then anyone, and they don't like losing.

Look the market is up on "hopes" of a deal, 100 points!

Imagine when they anounce a deal?

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