Now that we have temporarily postponed our dive off the fiscal cliff and into economic uncertainty, I wanted to write up a quick commentary on the cliff and why it has potential to harm the U.S. economy.
It seems to me that one of the primary ways in which the fiscal cliff could cause trouble is simply through the fear it instills in Americans, as much as it might be the result of actual changes to taxes and spending. Now, this is not to deny that 1.1 billion dollars in cuts the defense budget would surely influence our large defense industry potentially resulting in the loss of jobs and hampering growth in that sector. Nor do I want to suggest that changes to the tax code will have no consequences. However, the media hype and economist projections surrounding the cliff strike me as equally harmful.
One of the most important elements for economic growth and investment is confidence in the market. Despite the fact that the social sciences have never quite proven themselves to be effective soothsayers of the future, economist confidently “predict” the detrimental results of expiring tax cuts and enforced spending cuts. In part, such predictions only create fear and a loss of confidence in the market, further hindering investment and potential growth. To borrow a term from sociologist Robert K. Merton, such predictions become self-fulfilling prophecies. If we define the situation as an economic crisis, we will treat it as such. Rather than investing in growth and creating jobs, everyone will batten down the hatches. New projects and additional hires will be postponed for fear dire economic consequences. As a result, people will continue to be out of work, growth will stagger, and economic recession will return.
Is there a way for the media and economist to address the current situation without instilling fear? I wish the media recognized the incredible power that it wields to shape our economic future, opting instead for less sensationalized coverage of—and perhaps a less sensationalized name for—the fiscal cliff. But knowing that headlines which tout impending financial doom attract more attention than balanced views, we can expect continued media coverage which foretells economic disaster well into March. And the tone of that coverage will likely be a good predictor of the tone of our economy in coming months.