With the 2012 elections behind them, politicians in Washington must go back to doing whatever it is they do when they’re not campaigning. For once, however, they can’t merely resume playing “Kick the can down the road” (a favorite Washington pastime), for political gridlock and indecision have themselves come to a dead-end. The nation now faces a far scarier metaphor—the so-called Fiscal Cliff! What is this “cliff,” and how did it come to pass that we are dangling over its edge?
In a nutshell, changes in federal tax policy and measures to limit deficit spending—made worse by the recent recession and by efforts to ease its impact—are about to collide come midnight New Year’s eve 2012. Tax cuts affecting Americans of all income levels that were passed in 2001 and 2003 and then extended in 2010 are set to expire at the end of this year. So are the temporary reductions to payroll taxes enacted to lessen the impact of the economic crisis. And the loss of a tax cut will mean, in effect, a tax increase. On top of that, the Budget Control Act of 2011, which Congress passed to ease the federal deficit while raising the debt ceiling, has set in motion a series of “automatic” federal spending cuts that are to take effect on January 1, 2013. The combination of tax increases and broad spending cuts will likely lead to slower economic growth and to job losses in such industries as defense and health care that depend on government spending.
Economists worry that going over the Fiscal Cliff would lead the country into another recession. Political partisanship only has added to the pessimism and uncertainty surrounding the nation’s tough fiscal situation. President Barack Obama’s reelection appears to have strengthened the Democrats’ hand in negotiations. Although a compromise may be reached in the short run, the 113th Congress will have plenty of financial challenges to tackle.
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Related Links
- What is the Fiscal Cliff?
This website discusses the set of looming fiscal problems facing Washington that are together referred to as the Fiscal Cliff.
(About.com; accessed November 30, 2012) - The Fiscal Cliff Explained
The complex fiscal problems known as the “Fiscal Cliff” are explained in detail in this business publication opinion piece.
(Forbes.com, November 10, 2012) - Look Before You Leap: Understanding the Mathematics of the Fiscal Cliff
Check out this actual, albeit elaborate, classroom activity devoted to understanding the economic issues underlying the current fiscal crisis facing the federal government.
(New York Times: The Learning Network, November 28, 2012) - What Obama’s Win Means for Fiscal Cliff
This article focuses on the prospects for a compromise over the Fiscal Cliff in the wake of Obama’s reelection.
(CNN Money, November 7, 2012)
the fiscal cliff is scary