Maybe “fiscal cliff” was an inappropriate expression, for the US has gone over it in the sense that the last-minute deal in Congress solved nothing, yet the US economy has headed on. Unless, that is, this is a Wile E Coyote moment, and the economy has indeed gone over a cliff but does not yet know it.
As the State of the Union address is chewed over and digested we will get a feeling for how President Obama will tackle the fiscal disaster. Somehow the US has to cut the deficit by at least 4 per cent of GDP – their cyclically-adjusted deficit is 5.5 per cent of GDP, larger even than our own adjusted deficit of 4 per cent of GDP. You can have a debate as to the timescale over which this should be done and you can argue about the balance between tax increases and spending cuts but you can’t change the maths.
The question really is whether the deficit will be cut in a considered way or a random one. We know that the President will seek to avoid the process of sequestration, which will cut spending in a pretty indiscriminate way in the next few weeks, but to do that requires cooperation from Congress. We are unlikely to have much feeling for the outcome for several weeks and the problem for the rest of us is the noise of the American political system drowns out the signals for what is actually happening.
My instinct, for what it is worth, is that there will indeed be a sudden tightening of fiscal policy and probably in a fairly disorganised way but the economy will not be as severely affected as the alarmists have predicted. Wile E Coyote always had a bad landing. But he could always walk away.