Fiscal Cliff

The Fiscal Cliff refers to the combined effects of 1) raising the debt limit, 2) the expiration of the Bush Tax cuts (which were re-enacted in 2010) and 3) the sequesteration of spending cuts that take effect in January.

 

1) Raising the debt limit - if you recall, in the summer of 2011, the congress and President Obama were fighting over the debt limit.  For those that don't know, the debt limit is a required legal step that congress must follow to allow debt to be issued on behalf of the government.  It is a step to ensure that the Department of the Treasury (an executive branch department) can not run roughshod over the people (represented by their House of Reps).  After a prolonged fight, they reached agreement to raise the debt limit, but also put in place a mechanism to ensure that congress and the President deal with cost reduction as well - this was called the sequester, where if they could not agree on specific cuts, then massive cuts would take place automatically on 1/1/13 in military and some less severe cuts domestically.  The idea was that the sequestered cuts were so bad, that congress would surely agree to something more reasonable before the sequester was implemented.  Wrong- there was no agreement and the sequetered cuts are expected to be implemented in January.

 

2) Expiration of the Bush Tax cuts - in 2010 (after the house was moved to Republican control), the President and the congress agreed on extending the Bush Tax Cuts for another two years.  Even President Obama suggested that extending the cuts was the right thing to do during the protracted recession - this upset Obama's base as they had expected Obama to remain firm on extending only the 'middle class' cuts and allowing the highest rates to move back to rates prior to 2001, 39.6%.  Fast forward to the election and President Obama made the class warfare argument the centerpiece of his campaign.  His repeated calling for the 'rich' to 'pay their fair share' was a clear effort to satiate his base.  Well, the tax cuts will expire FOR EVERYONE in January if nothing gets done legislatively.

 

3) Sequestered Cuts - as mentioned earlier the sequested cuts equal about a trillion dollars over the next decade.  It is roughly broken down in to halves where half affects the military and half affects domestic spending.  This was considered so draconian that no one thought that legislators would allow them to be implemented.  However, we are still waiting on legislation to make this a more considered cut.

 

All told, if we go over the fiscal cliff, spending for government will be reduced (to the tune of $100B per year or so), taxes will go up for everyone (taking well over $200B out of the economy) and we will still be on a path for a total national debt of $20 TRILLION by 2016.  The only way to to fix this is to reign in ENTITLEMENT spending (Social Security - which includes not only retirees but handicapped and disabled workers, Medicare, Medicaid), which has ALREADY spent $87 trillion more than is expected to be collected.

 

The effects of the fiscal cliff are still not understood.  There are some on the right that want the fiscal cliff to happen because despite the impact on the economy, restraint in spending will be good in the long term and they argue that if the Clinton tax rates were so great and led to such a wonderful economy than why on earth would it be not even better to let all the tax cuts expire rather than just on the rich.

 

The right NEEDS to stay on message about reforming entitlement spending.  If we don't get meaningful changes to entitlements now during these negotiations, then I think the best alternative is to go over the fiscal cliff.  This is what the columnist that Sara found was arguing as well.  What do you think? 

 

Hope this helps