The Four Myths of the Fiscal Cliff


The media, pundits, and leaders from both political parties continue to warn of the impending fiscal cliff. Amidst all this chatter, four myths are being promoted as established fact. All are incorrect. Public policy based on such mythology threatens this nation’s economic well-being.

MYTH 1: The Essence of the Fiscal Cliff

According to accepted political wisdom, the fiscal cliff refers to diminished economic growth resulting from increased tax rates on the middle class combined with federal discretionary spending cuts. Acceptance of this definition ignores the actual fiscal cliff. The REAL fiscal cliff is the economic ruin that long term structural deficits and excess spending built into our federal budget through baseline budgeting. If federal spending actually strengthened the economy, we would be experiencing an unrivaled boom. Instead, we are in the midst of a post WWII record low employment level growth. The real fiscal cliff is caused—not avoided—by high federal spending.

MYTH 2: The spending cuts are too deep

Over the past 20 years, federal spending has grown a cumulative 71% in excess of inflation. In 1992, federal spending was $2.079 trillion in 2012 dollars. In 2012, federal spending totaled $3.563 trillion. The aim of the sequestration is across the board spending cuts with the goal of reducing the deficit by $1 trillion over ten years. In the first year of sequestration, $109.4 billion in cuts would occur from the 2010 budget baseline. This totals just 3.1% of the total 2012 budget. In fact, because the baseline grows each and every year, most of the cuts are not really cuts at all! The baseline cap—which grows every year—is simply reduced from previous estimates. Of course, cuts to military and non-discretionary spending exceed 7% of the baseline for 2013. The military cuts are of particular concern. However, to suggest that finding 3.1% savings in the overall federal budget is somehow extreme simply denies reality.



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