CHH Politics: Economy may not escape fiscal cliff

CHH Politics: Fiscal cliff

Kwabena Boateng

In May, a group of archaeologists found a Mayan calendar that revealed that doomsday won’t happen this December. While the world will avoid catastrophe come December 31, our economy may not escape crashing down a “fiscal cliff” if our Congressional leaders can’t make some quick compromises on spending cuts and taxes. At least that is what news outlets continue harping. What is the problem? There are several tax cuts, including some from the Bush era and President Obama’s first term, that will expire at the end of this year if Congress doesn’t extend them. In addition, several budget cuts will automatically occur, including reductions in the defense budget and Medicare compensation to physicians.

Should Congress not renew the tax cuts, according to report by the Tax Policy Center, “nearly 90 percent of all households [will] face tax increase averaging nearly $3,500” in 2013. The flipside is that an additional $500 billion will be raised in tax collections. Also, Brian Montopoli and Alain Sherter of CBS News report that automatic spending cuts would amount to $1.2 trillion. Of that $1.2 trillion, the Congressional Budget Office (CBO) estimates that $55 billion would be cut from defense spending in 2013—that would be less than 10 percent of the $687 billion defense budget in 2011. It should be noted that these spending cuts won’t all happen in January; $1.2 trillion won’t magically disappear in January. It will happen over a 10-year period. That is why this isn’t a cliff. Rather, as Heidi Moore of Marketplace Radio describes, it will be a fiscal “bunny slope” that could turn into a “black diamond slope.”

So, should we be worried? In the short term, yes. If Congress does absolutely nothing, and allows for the status quo, the economy could turn for the worse. As Corey Boles of the Wall Street Journal explains, the CBO predicts inaction “would drive the U.S. economy back into recession” for 2013. However, that same report expects these cuts to “better growth rates and lower unemployment” by 2020.

I personally think budgets should be balanced, especially considering CBO reveals that “federal debt held by the public [exceeds] 70 percent of GDP,” which will continue to rise if we continue to overspend. Our politicians must now find a bipartisan solution. Some are making a decent attempt. Republicans are now open to raising taxes; Democrats might consider social program trimming. If they don’t do it before December 31, don’t worry, something will be done in January, regardless of what the Mayans predicted.