Understanding the Fiscal Cliff Negotiations

| December 18 2012
The Hot Spot

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By Roger Johnson

To understand the fiscal cliff negotiations, it is crucial to understand what the fiscal cliff is. The fiscal cliff is a term used to describe an economic conundrum that the United States government will face in the early days of 2013. A lot of laws are going to change, which will result in tax increases for businesses and individuals. Not only that, automatic spending cuts will automatically be implemented. Over 1,000 programs will experience deep cuts.

Implications

If a deal is not reached, there could be a long lasting effect on the United States economy. Many economists predict a recession sometime in early 2013, though they think the effect will be short lived. More importantly, a lot of government programs will be cut, which will have long term implications for  a lot of people. With business tax cuts ending, many fear that our economy will have another recession, as businesses must cut costs. There are two major options that lawmakers have if they want to fix the issue at hand. Unfortunately, neither of these options are very desirable.

Do Nothing?

Lawmakers can simply do nothing. They can allow the policy, scheduled for early 2013 to take effect. This policy has a lot of bad things on the table, which will hurt the economy. This features a lot of increases in taxes and spending cuts, which could harm the viability of the United States. This could cause the United States to go back into a recession. On the bright side, the deficit will be cut in half, when measured as a percentage of the gross domestic product.

Pick and Choose

Lawmakers can remove all of the scheduled tax increases and cuts in spending. Or, they can pick and choose which ones to remove. Unfortunately, this will add to the debt too, which will have long-term, disastrous effects if not fixed. Even if they remove some of the tax cuts and spending cuts, it will only be felt modestly. Picking and choosing is the most likely option. This is why both President Obama and republicans such as John Boehner are meeting often.

Misleading

While there are problems with the fiscal cliff, the whole term is misleading. Yes, there will be issues, but in reality, the media is blowing the issue out of proportion. There is no doubt that without doing anything, a recession could occur. In reality though, the recession would be modest and short lived. Not only that, congress and the president can work together after the deadline. In reality, if no deal is reached, there is no cliff we all will go off of. That is not to say that there will be serious consequences, but it will not be as bad as some in the media would lead you to believe. The fiscal cliff negotiations are largely sensationalized by both the American and world media. In reality, a compromise should be reached at the last hour by both sides. For most people, there should not be any long term effects, due to the fiscal cliff and the negotiations. Still, being well informed about the issue is smart, because it can potentially have real long-term consequences.

Roger Johnson writes about politics, economics and business at the Business School Journal.