So how steep is that fiscal cliff?

John Cochrane reckons the US government is doing the usual:

There are no “cuts” in sight anyway. “Cut” in Washington means “increase spending less than we previously said we would.” At worst a few programs will have to spend the same amount this year as last before spending increases resume.

That would be my expectation – but no. It seems there might actually be some spending cuts. Bob Murphy had a look at CBO data.

We are already in Fiscal Year 2013; it started on October 1. So the column for 2012 is already done; the changes (if no deal is reached) will show up in the 2013 numbers.
So: If nothing is done and we go over the “cliff,” then total spending will drop from $3.563 trillion to $3.554 trillion, a reduction of $9 billion, or 0.3%. Notice everyone, I am saying a drop of three-tenths of one percent. Then, by 2014, total spending will have risen to above where it was this year, in 2012 (because 3,595 > 3,563).
On the revenue side, going over the “cliff” is projected to raise receipts from $2.435 trillion in 2012 to $2.913 trillion in 2013, an increase of $478 billion, or 19.6%.

So the decrease in the US deficit is being driven by tax increases not reduced spending.

Is that a problem? After all a whole bunch of people reckons that it doesn’t matter if you reduce the deficit by increased taxation or reduced spending (or some combination). Well, Cochrane explains:

To an economist, the main worry is that higher marginal tax rates mean more distortions, which are a drag on the economy. But distortions take a while to kick in. It takes a while for people to change to easier jobs, not start businesses, move businesses offshore, not go to school, choose easier but less rewarding majors, find more tax shelters, and so on. So the danger is not so much a recession, which comes, and then ends, and we go back to growth. The danger is settling in to a decade of (even more) high-distortion, sclerotic growth.

Cochrane isn’t worried about recession – he is worried about long-term distortions induced by poor government policy.

How terrible will it be if we go over the cliff?

Bad, but for all the wrong reasons. If you, like me, didn’t think that “stimulus” from government spending raised GDP in the recession, you can’t complain that less government spending will cause a new recession now. The CBO’s projections of recession are entirely Keynesian. Pay them heed if you still think the key to prosperity is for the government to borrow money and blow it.

Overall that cliff isn’t too steep. Tax increases are bad policy. The proposed spending cuts are not nearly enough.