"We may avoid the fiscal cliff, but the fiscal pain is unavoidable..."

By Alex Raskolnikov

What will happen if we go off the fiscal cliff? The answer is familiar to many: Tax rates will go up, tax holidays will expire, large cuts in military spending will take place, and social programs will lose some (and, perhaps, more than some) funding. And what if we avert the cliff and regain our balance? This time, the answer may be less familiar: Taxes will rise, military spending will be reduced, and social programs will be downsized. There are important differences between these two scenarios, however. If we go off the cliff, the spending cuts and the tax increases will take place by operation of the law that is already on the books. No new legislation will be required; no bipartisanship will be necessary; no wrenching decisions will need to be made. Relatedly, winners and losers in this scenario are well-known already. If we are to avoid the cliff, however, Congress and the president must join in making some of the most painful and far-reaching economic choices of our times. We cannot continue to run trillion-dollar deficits much longer, or we will become another Greece (with no EU to bail us out). Sooner rather than later, we will need massive spending cuts and major revenue increases to avert a fiscal catastrophe that would make the current fiscal cliff look like child’s play. The crucial question, then, is how the burden of higher taxes and lower social spending will be distributed, not whether higher taxes and smaller social programs are coming. We may avoid the fiscal cliff, but the fiscal pain is unavoidable.