The Fiscal Cliff Explained


Negotiations earlier this year left the fiscal cliff only partially resolved. (Michael Casey / Flickr)

On January 1st, 2013, lawmakers were able to evade tumbling over the fiscal cliff by both forging a deal to extend the deadline for sequestration (mandatory budget cuts) to March 1st and passing a bill that allowed income taxes to rise for Americans making above 400,000 dollars. The “fiscal cliff”, a term coined by Federal Reserve chairman Ben Bernanke, refers to the combination of scheduled spending cuts and tax increases which would have likely caused an overall contraction in the US economy in 2013. Yet by leaving the issue of sequestration unresolved, lawmakers have allowed a new fiscal cliff to emerge.

This new fiscal cliff holds the same dire consequences as the old. Goldman Sachs estimates that the consequences of this crisis could in fact be even more severe, which makes understanding it all the more essential. Herein lies a quick summary of the facts, potential consequences, and a rough guide to the politics of the new fiscal cliff.

The imagery of the cliff is wonderfully evocative of America’s impending turmoil; one can imagine the American train hurtling towards a deep ravine at an impossible speed. This imagery of the fiscal cliff has sparked some debate. The Washington Post’s Wonkblog suggests a better term is “austerity crisis” because of the focus on austerity in the government’s spending. The Center on Budget and Policy Priorities thinks it is more of a “fiscal slope.” The Economic Policy Institute calls it an “obstacle course.” I prefer the term “the grand incentive” due to the nature of fiscal cliff being manufactured by Congress in order to incentivize them into a favorable dealing disposition. However the fiscal cliff isn’t as simple as any of these terms suggest – rather, it is the product of several different factors.

The new fiscal cliff includes severe spending cuts that will take effect on March 27th, 2013. The Budget Control Act of 2011 mandates the sequestration. According to the Center for American Progress, various estimates of the cuts that would be required in programs subject to sequestration range between 8.5 percent and 10 percent for fiscal year 2013.

There is a significant discussion on what these cuts would look like, as sequestration would impact different programs across the government in very different ways. One highlight of sequestration is its negative impact on defense spending, which Republicans are deeply defensive in manner. For example, Senator John McCain commented that the defense cuts contained in the sequester would be a “crippling blow to our military.”

Some believe that falling off the fiscal cliff is the inevitable outcome of partisan gridlock in Washington D.C. Others, like Georgetown Law Professor, David A. Super, believe that the fiscal cliff is an appropriate solution to some of our national problems because of its equal effect on everyone.

The fall is unlikely to occur because of the consequences it would incur. Analysts have predicted that a fall off of the fiscal cliff will weaken the economic recovery and potentially induce a recession. The Congressional Budget Office predicts that the United State economy will shrink and unemployment will rise to 9.1 percent.

The politics surrounding this new fiscal cliff are fairly navigable and devoid of the aspirations for “Grand Bargains” from either parties. The Senate Majority Leader Harry Reid of Nevada has laid out a $110 billion plan to replace the sequestration with higher taxes on the wealthiest Americans, but this is unlikely the pass in the Republican-controlled House. Senator Mike Crapo of Idaho said of the plan, “The idea of raising taxes is moving in the wrong direction.”

After facing controversy over his handling of the first fiscal cliff, John Boehner presented a conciliatory tone to the Senate Majority Leader stating that, “If they’re willing to pass a bill, we’ll find some way to work with them to address this problem.”

This kind of rhetoric indicates the conflicted mood within the Republican Party and presents at least some hope that the Democrats and Republicans will reach some kind of deal on the fiscal cliff before March 1st, 2013.

In the State of Union, Barack Obama stated that, “our work must begin by making some basic decisions about our budget — decisions that will have a huge impact on the strength of our recovery.”

Indeed, every proposal from gun control to education that the President described in his State of the Union address is predicated upon a successful resolution to the crisis of fiscal cliff. As students in college, we can hope that a deal will be reached and encourage our representatives to agitate on our behalf.

Andy Willis is a sophomore Claremont Mckenna majoring in Religious Studies and Government. He is a Staff Writer and Beat Reporter for the Port Side. He has no idea where this college experience will lead him, but has a definite feeling it will be a place both wonderful and strange.

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Published with support from Generation Progress.

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