Walt Laws−MacDonald | Show Me The Money!

The fiscal cliff. If you haven’t heard the name yet, you certainly will soon. So what is it?

First, some context: The United States — and most of the world — is still in a very fragile economic state. Following the credit crisis of 2007 and subsequent recession, our economy is very slowly working its way back to normality. The word “recovery” has become somewhat of a taboo. Everyone wants it, but we’re afraid that the mere utterance of the word will send economic growth into the ground and spike unemployment.

Despite what certain politicians want you to believe, our government has done a lot to spur economic growth over the past four years, including but not limited to the Troubled Asset Relief Program (TARP), Obama’s 2009 stimulus package, the prolonging of the Bush−era tax cuts and the 2010 Obama−GOP tax deal.

The problem with any economic stimulus is that it forces the government to a run a budget deficit, which the U.S. is sort of a pro at doing. By outright value, our national debt is the largest in the world, topping $16 trillion. But the deficit is not going to break the economy. Despite what the S & P says about our credit rating, our government is the most trustworthy borrower in the world.

Back to the fiscal cliff. The majority of these economic stimulus plans are set to expire at the end of this year, which would significantly reduce government spending and revenue. However, many believe that the economy has not recovered enough to warrant bringing the programs to an end.

Essentially, the government faces a choice: let the stimulus plans expire and reduce the deficit, at the cost of capping the speed of the recovery, or renew the tax cuts and continue to grow the deficit. Pick your poison.

To complicate things, many spending cuts and tax increases that resulted from last year’s debt ceiling debate will come into play at the same time. Say the economy is a fire: the stimulus spending is like lighter fluid and the tax cuts are like a giant bellows. Letting the policies expire and enacting the new legislation would be the equivalent of removing both of these aids. Maybe the fire will keep going, but it certainly won’t be as strong.

The Congressional Budget Office estimates that the negative effects would lower GDP growth by 4 percent, sending the economy into another recession. JPMorgan economist Michael Feroli estimates that the spending cuts and tax increases would remove nearly $100 billion in capital from the economy.

Like most economic issues, this is a pretty big deal. Unfortunately, the presidential election will take the spotlight in the coming months, leaving little time to actually work on the issue. Both candidates hardly explicitly talk about the fiscal cliff on their election websites, and it wasn’t mentioned at all in Wednesday’s debate. Ridiculous. But, voters want to hear about job creation and economic growth, not looming tax cuts or anything called a cliff.

No one can read Congress’s mind, but I do expect action on the issue before 2013. Some tax cuts will stay, but so will some spending cuts. If the GOP insists on taking its hardline approach on tax increases like it did during the debt ceiling talks, the issue will become much more complicated.

The U.S. economy has proven more resilient than its European counterparts over the past five years, and it recently surpassed thirty consecutive months of job creation. But this is different. The fiscal cliff will be a test not only for Congress, but also for the U.S. economic engine itself.

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Walt Laws-MacDonald is a sophomore majoring in quantitative economics. He can be reached at Walt.Laws_MacDonald@tufts.edu.