Jeremy Truitt
An attempt to understand the world of current events, finance and the economy on a level that allows me to teach it. I'm a journalist. Oh and the occasional post about family, life and kids!
What The &%$# Is A Fiscal Cliff?!
Fiscal cliff!! Sounds scary. You’ve heard it on every network news program. You’ve probably seen it on Facebook and if you’re in those circles then you’ve been talking about it with colleagues.
Here I’m attempting to break it down so an individual can actually understand it. Think of it like this: The economy is running along being tough and resilient (after all, we’re American’s right?) This so-called “fiscal cliff” comes up at the end of 2012 and the economy runs right off a cliff and falls down about 100 feet. Why does that matter? Because if it does that then jobs are lost, the unemployment rate rises and the U.S. GDP falls which could send us back into recession.
What does the term “Fiscal Cliff” actually mean? (Disclaimer: As with all posts, this will not deeply analyze every minute aspect. It will give an in-depth overview). SOURCE: Committee For a Responsible Federal Budget.
- Tax cuts will expire. Under President Bush, expansive tax-cuts were issued and President Obama has extended many of them. You and I may not feel them because we don’t know about them, but if they’re taken away we WILL feel them. They will almost all expire at the end of this year if Congress does not intervene. In a nutshell, taxes will increase nationally by $380 billion.
- Roughly 1,000 government programs will either be severely de-funded or eliminated immediately. That, coupled with deep spending cuts will result in about $65 billion in cuts just in the 2013 fiscal year ($30 billion of that is in defense spending). That’ll hurt because it equates to $1.2 trillion in spending cuts in 10 years.
Okay that all sounds exciting, so what about the real effect on the country? GDP? Unemployment?
First, let’s start with the consequences of continuing down the same path we’ve been on with keeping everything as it currently is. You know, “kick the can down the road a bit.”
- The cost would be about $1 trillion dollars between fiscal 2013 and 2014.
- Real GDP should go up 2.1% in 2013, meaning we’re in pretty good shape.
- Unemployment should go down another 1.1% in 2013.
- By 2022, GDP should begin to level off and even stall, going flat or even falling a percentage point.
Here’s what would happen if Congress allows the U.S. to travel over the fiscal cliff:
- The CBO estimates the economy will contract significantly. Specifically 1.3% just in the first half of 2013. It would however grow enough to end the year positive about .5% though. That means huge layoffs.
- The economy would almost certainly enter another recession.
- Layoffs could reach millions, pushing unemployment to 9.1% from its current level of 7.9%.
- The total public debt could drop from 90% of GDP to roughly 58% of GDP.
Here’s the deal. There are a million different arguments we could all make about this issue and how to fix it or correct it, yada yada yada. We face a very serious situation. If we deal with it NOW, it will hurt a lot of people. If we kick the can down the road again, it will delay the inevitable, which will then hurt a lot of people very badly. Here’s the summary from the Committee for a Responsible Federal Budget:
“At the end of the year, Congress and the President will face what appears to be a daunting choice: either allow the country to go off a recessionary fiscal cliff all at once, or doom the country to large deficits that will permanently slow economic growth and increase the likelihood of a fiscal crisis. Allowing the country to hit the fiscal cliff at year’s end would be a dangerous mistake, but adding $7.5 trillion to our debt by extending the expiring policies and repealing the sequester, without putting the budget on a more sustainable path, would be a travesty.”
Credit: The Week
“COMPROMISE IS NOT WEAKNESS, IT’S LEADERSHIP”
Related articles
- CBO: Fiscal Cliff Will Bring Recession, 9.1 Percent Unemployment in 2013 (cnsnews.com)
- The Completely Transparent FORBES Guide To Understanding The Fiscal Cliff (forbes.com)
- The ‘Fiscal Cliff,’ Explained (nytimes.com)
- The U.S. Fiscal Cliff: Just What The Hell IS IT?? (theobamacrat.com)
I’m actually terrified if I let myself think upon these things too much. Things are just so out of control. Thank you so much for this fantastic information!
They there! Thanks for the comment. I agree, they are quite scary.
It’s my understanding that if every possible tax increase/spending cut currently envisioned as part of the fiscal cliff were allowed to happen it would cut GDP growth by between 4-5%. Since we’re currently growing between 2-3%, it would automatically send us straight into a recession. That’s why it’s highly unlikely that the morons in Washington will allow it to happen as their instincts for self-preservation will kick in. Watch for a few minor compromises and a lot of “kicking the can down the road” delay tactics. I hope more people will express their outrage so that something gets done before the stock market tanks.
Yes your numbers are correct. If it is allowed to transpire the effects will be disastrous in the short-term. What’s interesting though is kicking the can down the road could potential make it even worse. It’s a tough one! Thanks for the comment!