Sunday, November 18, 2012

The cliff, the slope, and expectations

There's a lot of talk going around about how the fiscal cliff isn't really a cliff - it's a gradual slope. I'm sure that's reassuring to some people. What I find interesting is that that claim has an implicit assumption about rational expectations in it, and it's actually a pretty simplistic claim that caused quite a ruckus among economists several decades back.

And it's not just a mean freshwater assumption. It's the assumption that liberal economists used to complain about Bush's tax rebates.

So what do we conclude from this slope vs. cliff claim? Are all the people claiming that the reality is a "fiscal slope" naive when it comes to expetations? Or do they have intuitive insight into an issue that for macroeconomists has just been full of sound and fury, signifying nothing?


  1. It's a fiscal Cooper's Hill...

    The politics are rather like Cheese Rolling too. There is the chance of serious injuries whether you win or lose and the victory is something only understood and respected by a small elite.

  2. The January 1, 2013 deadline is going to be missed because to make a deal one side or the other has to betray its base. When they go past that deadline at an impasse, all hell is going to break loose.

    Doing a deal will be very difficult but doing the right thing for the country would be even harder and upset even more people because the right policy would include a middle class tax increase.

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  4. Daniel I think you need to spell out for your readers the two sides a little better here. I don't know what you're talking about.


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