Over the Fiscal Cliff

If you’ve listened to the news lately, you may have heard the term “fiscal cliff.”  You may have heard that falling off it, not unlike falling off an actual cliff, would be catastrophic. But what are the particulars of the fiscal cliff? Why is it such a big deal? To find out, this author spoke with Will Keenan, an auditor for the International Olympic Committee, and a political and economic expert, about the fiscal cliff.

What is the fiscal cliff?
-The “fiscal cliff” has become a popular expression that refers to a combination of U.S. federal tax increases and across-the-board spending cuts that are scheduled to come into effect in 2013, if the existing Budget Control Act of 2011 is not amended before the end of 2012. The objective of increased taxes and reduced spending is to cut the federal budget deficit. The sharp drop in the deficit in such a short period of time, when illustrated as a graph, closely resembles a cliff, thus leading Federal Reserve Bank chairman Ben Bernanke to coin the term “fiscal cliff.”

What is the effect of government debt on the economy?
-Government debt can be good or bad for the economy, depending upon the effect it has on long term growth of the gross domestic product (GDP), unemployment, and inflation. Deficit spending can at times be helpful for the economy, as it helps reverse the effects of a recession or depression.

Why is the United States heading for the fiscal cliff? What caused it?
-The “fiscal cliff” is the culmination of a series of confrontations between the Democratic and Republican parties in recent years. The debt-ceiling fight of August 2011 threatened the country’s ability to meet its financial obligations, leading to a downgrade in the U.S. credit rating by Standard and Poor’s. The subsequent failure of a bipartisan “super-committee” to reach a deal on budget savings resulted in the Budget Control Act of 2011 that mandates spending cuts for both defense and non-defense spending.

How will the economy be affected if we go over the fiscal cliff?
-The sudden implementation of significant budget cuts while the still recovering economy is weak, has led most economists to predict a new recession and rising unemployment in 2013 if Congress fails to agree on a more moderate solution.

Can we avoid falling off the fiscal cliff? If so, how?
-This question is more political than economic. If the two major political parties can agree on more moderate approaches to increasing revenues and reducing expenditures, then the “cliff” disappears.

How would a failure to avoid the fiscal cliff affect the average person?
-An increase in unemployment–projected by some economists to reach 9% or higher–would mean average people losing jobs and would make it more difficult to find new employment. In addition, the increases in taxes would [effect] everybody, which means the whole populace will see their income decrease.

If we do go over the fiscal cliff, is there anything that can be done to alleviate the effects?
-This is another political question, since government action to alleviate the effects presumably requires the same sort of political cooperation, the absence of which created the “fiscal cliff” in the first place.

What do you think will happen in the coming weeks?
-The Democrats have a bargaining advantage in terms of tax increases because taxes will go up for every citizen if no action is taken. The Republicans, however, will likely accept higher taxes on the very rich, if some concessions are made by the Democrats on spending.