Fiscal Cliff (Part 2)

In 2008, after President Obama won the election the country was in a state of economic chaos. In response Republicans claimed the President needed to create jobs and deal with the overwhelming debt. However, before the President had a chance to deal with these issues he found that the first bailout was not doing a sufficient job of rescuing banks and businesses from destruction. As a result, he authorized a second bailout which he felt would stabilize the banks and businesses to something resembling a “normal” level. Once he did this the shouts from the Republican Party became even louder that the bailouts were not working and that they actually were a sign of the government spending money uselessly. This was one of the main reasons for the rise of the controversial wing of the Republican Party commonly known as the Tea Party.

 

There is no doubt that the bailout that the President authorized added to the national debt. However, a large portion of the national debt existed before President Obama took office due to unpaid war expenditures and the first bailout.

 

By 2010, national discontent had grown to such a point that Republicans (particularly Tea Party Republicans) gained many seats in Congress. Where the Democratic Party had majorities in both the House of Representatives and the Senate, they now lost their majority in the House of Representatives and narrowly held on in the Senate. Republicans interpreted this change of political winds, as a mandate for them to continue to push for the limitation of government spending. They interpreted this to mean that they could not allow any raising of taxes, because if more tax money was raised they felt it would go into spending on existing or new government programs instead of going to pay down the debt. In any case Republicans don’t ascribe to the idea that raising taxes can pay down debt. But even if some moderate Republicans did they signed a pledge never to raise taxes for any purpose. Even more vexing was the fact that the nation had come upon its debt ceiling.

So what is a debt ceiling? Well just like when a family has a credit card that has a credit limit, the government has a limit on its credit card or more simply it actually has a legal limit imposed by Congress on how much debt it can take on. Every so often the government will reach this limit and Congress will pass a simple resolution to have the limit raised. When this limit is reached it is referred to as “reaching the debt ceiling” and when Congress votes to raise the limit it’s referred to as “raising the debt ceiling.” Since the raising of the debt ceiling is a matter of the government guaranteeing that it will actually pay back the money it has borrowed and the money that the country borrows is usually for things that both political parties support (such as the wars in Afghanistan and Iraq.) The debt ceiling is raised without much fanfare or talk about it. However, when the debt ceiling last came up for review Republicans refused to vote to raise it unless steep cuts were made in government spending.

By 2012 these factors made it very difficult for them to negotiate with the President when it came to balancing the budget because in support of their platform to limit government the Republicans only wanted to balance the budget by cutting funding to government programs, and reducing support provided by government programs. In particular they supported cuts to Medicare, Medicaid, and Social Security. On the other hand, the Democrats weren’t completely against cuts in certain programs but they also wanted cuts in defense spending and they wanted to raise taxes, most particularly on people and businesses earning more than $250,000 a year. There are various rationales for these positions which I can get into later. But for right now it is enough to understand that the inability for the Republicans and Democrats to agree on these two positions is the reason behind the fiscal cliff.

 

Due to the inability to compromise a stopgap solution was settled upon. This solution was that Republicans and Democrats would set up a “Super committee” comprised of 6 Democrats and 6 Republicans with the mission to represent the Republican and Democratic positions in the budget balancing debate The penalty for this group not coming to an agreement would be that the taxes would automatically be raised for everyone to the rates of the Clinton years. The second part of the penalty was that the government would automatically implement cuts across the board in programs ranging from Defense to education. This second part is called a sequester. As a result, the penalty for not coming to an agreement was a comprehensive tax increase combined with a comprehensive cut in government programs.

 

As a part of this deal, the Republicans finally voted to raise the debt ceiling so that the government could continue to operate into past the election and into the next year.

Needless to say the Supercommittee did not come to an agreement by the appointed date. Therefore, the aforementioned penalties were set to take place by the beginning of the next year. In addition, the debt ceiling was set to be reached within the same time period.

 

This brings us up to the current period approaching January 1st2013.

So, now you can see that the fiscal cliff is the combined tax increase and government cuts that are set to take place in just about three weeks. Finally, the reason it is called a fiscal cliff and another reason that you should be seriously worried about the possibility of a fiscal cliff is that many economists have said that the consequences of such drastic changes to the way the government does business would result in a second recession at a time when the economy is still weak and unemployment remains at levels most consider unacceptable. Possibly even worse, the government is set to have another bitter battle over raising the debt ceiling once again which could result in a further shutdown of government across the board.

 

Given all this I think what is likely to happen is that the government will find a way to kick the can down the road some more. So I’m not saying be afraid, but be aware. Be aware that the decisions made in Washington DC can have some very significant effects on your life.

 

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