It seemed the election had barely been decided when a new buzzword began to dominate the airwaves: the “fiscal cliff.” The elation (or disappointment) of election night seemed to give way into an urgent panic as many realized that the U.S. was still facing the same gridlocked government — a Republican controlled House and a Democratic Senate and White House — whose intransigence over how to shrink the federal deficit during the summer of 2011 led Standard & Poor's to downgrade the United States’ credit rating from AAA (the highest) to AA. In its own convulsion of uncertainty, the stock market took a 2% hit and the Dow Jones dropped over 300 points on November 7.
The term “fiscal cliff,” coined by Federal Reserve Chairman Ben Bernanke, refers to a simultaneous increase in taxes, coupled with sharp cuts in all discretionary spending, known as “sequestration,” stipulated by the Budget Control Act of 2011. Essentially, this means that the Bush-era tax cuts will expire, leading to a 2% payroll tax increase (a return
to the tax rates of 2000), and up to a 5% income tax increase. Meanwhile, all discretionary programs (any programs on which expenditure is not required by already existing laws) would face about 9% in cuts across the board. While such measures would be painful, they would result in a 50% decrease in the federal deficit (as a percentage of GDP). So what’s all the fuss about? After all, we’ve spent most of this election season listening to candidates talk about the dangers of an increasing federal deficit and the threat it poses to our economy. Reducing the deficit is good, right? Well, not exactly. Most economists agree that such dramatic cuts in government expenditure coupled with raising taxes would trigger another massive recession.
While the fiscal cliff would save the U.S. $1.2 trillion over ten years, whatever money would be saved on the deficit would be paid for in jobs and economic growth. They would likely impact the economic recovery, costing an estimated 3.4 million jobs and leaving the average American with less disposable income.
Though negotiations on the fiscal cliff stalled during the election and Congressional recess as the country waited to see if the balance of power, both in the White House and Congress, would shift dramatically towards one party or the other, the “fiscal cliff” is the climax of a nearly four-year long battle between the left and right about the most effective ways to reduce the deficit. Republicans favor cutting spending, especially on entitlement programs, while Democrats are eager to see a return to the higher tax rates of the Clinton years. The two parties’ inability to reach a compromise last year led to the creation of Budget Control Act of 2011, which allowed the Government to do what it does best — kick the can down the road. The Budget Control Act is, in effect, an ultimatum; it gives both parties what they want at the same time (higher tax rates and deep spending cuts) but at the cost of the economic health of the country, thereby forcing the hands of all parties involved to come to a more reasonable compromise.
Three days after the presidential election, no doubt humbled by Republican Mitt Romney’s defeat, House Speaker John Boehner (R-Ohio) announced that the GOP would be willing to strike a compromise in fiscal cliff negotiations. That same day, President Obama gave a speech in which he acknowledged that, though he was not “wedded” to every aspect of his budgetary agenda, his re-election signaled that “most Americans agree with [his] approach.” So far, the political posturing that has preceded the negotiations has been less than encouraging, with each
side offering compromise while restating their unchanged positions. In reality, both sides are running out of time and options.
At this point, the White House and Congress are left with three options: yet again put the
decision off until later with another extension of the status quo, actually strike a deal, which will likely have to include some cuts to entitlement programs and more reasonable tax increases, or stand their ground and fly full force off the fiscal cliff, taking the economy and the American public down with them.