5 Things To Do if the Fiscal Cliff Happens

US News

So it has come to this. The stagnant economy is showing signs of life, except that a dysfunctional Congress seems intent on snuffing it out. We have arrived at the fiscal cliff.

If Washington politicians can't reach a last-minute deal, 2013 will begin with a big batch of tax hikes and cuts in government spending that could lop four percent off GDP and trigger a recession. It's a maddening turn of events because the huge mismatch between the government's spending and revenue--along with the cliff deadline itself--are entirely man-made problems that could be solved by rational people applying the same logic it takes to run a business or manage the family finances. But occasionally we must put up with outrageous political posturing as part of the price we pay for a free society.

[ENJOY: Political Cartoons on the Fiscal Cliff]

So we may have to deal with the fiscal cliff for a while. Here are five ways to do it:

First, relax. As outlandish as the cliff standoff may seem, many analysts thought all along that it would probably come down to a faux crisis with each side refusing to make the concessions required to get a deal during a lame-duck session of Congress. Republicans may feel they'll have more leverage to demand deep spending cuts as part of a broad tax-reform package, which will take months, not weeks, to work out. Some Democrats believe it will be easier to raise taxes on the wealthy by simply leaving their rates unchanged after they go up on January 1, than by voting for a tax hike now.

The broader point is that blowing deadlines and creating panic, for better or worse, is part of the American political process. Panic itself may even help clinch a final deal, if, for instance, the stock market craters. So if that happens, keep in mind that it's all part of the script.

[READ: How Much Will the Fiscal Cliff Cost You?]

Call your representatives in Congress. You, dear citizen, have an important role to play in the fiscal-cliff drama, by vocally expressing your outrage as Congress threatens to tank the economy. When enough of you demand action, Congress will act.

Turn off the TV. Until Congress reaches a deal, the media will find little else to talk about. The endless chatter will create the mistaken impression that the whole country is going down the tubes and gloom is everywhere. Reality is a bit more uplifting: The housing market is recovering, consumers are feeling better about their finances, and a real recovery might even take hold--if only Washington would do its job.

Postpone spending. The odds still favor a benign outcome to the fiscal-cliff drama, but it's increasingly possible that political brinksmanship really will cause another recession. Moody's Analytics puts the odds of a recession at 37 percent, the highest level in about 15 months. That risk has spiked on account of the fiscal cliff. Reining in spending will hurt the economy, of course, but given Washington's dithering, it's only prudent.

[NEWMAN: The Right Way to Resolve the Fiscal Cliff]

Get some cash ready. One plausible scenario is a plunge over the cliff, followed by a three to seven percent drop in the stock market, which puts pressure on the cliff-hagglers to bend just enough to retroactively roll back tax hikes and spending cuts after they go into effect on January 1. This roller-coaster ride might completely unnerve investors, but Wall Street money managers are also telling their clients it could be a perfect opportunity to buy the dip to make a quick profit if stocks rebound following an after-the-buzzer deal.

That would depend, of course, on Washington politicians ultimately doing the right thing. For some, that may seem too risky a bet. Gambling on a happy outcome in Washington takes a lot more guts than it used to.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

View Comments (752)