Tags: fiscal | cliff | definition | FAQ

Fiscal Cliff: What is the Definition? What Does it Mean? FAQ on Looming Crisis

Thursday, 15 Nov 2012 09:17 AM

By Peter Moses

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For months now Americans have been listening and reading about President Barack Obama and the lawmakers in Congress volley back and forth about the U.S. falling off the “fiscal cliff” if a deal isn’t made by the end of 2012. Below is a primer about the issue and what it all means to the average American.

Who came up with the term “fiscal cliff?”
There were several instances of the phrase being used prior to Federal Reserve Chairman Ben Bernanke while he was addressed the House Financial Services Committee on Feb. 29, 2012. The two most likely sources were comments made by Republican Sen. Jim DeMint in 2008 or a Reuters news wire service story that came out two weeks before the phrase spilled out of Bernanke.

So exactly how did this whole thing start?
In the summer of 2011 Congress passed the Budget Control Act, a bill mandating the formation of a “super committee” to develop a plan to trim $1.2 trillion off the national debt. In order to give that mandate, and the committee, some teeth, the act calls for automatic deductions in spending and increases in taxes so draconian that Congress would not allow that to happen.

And?
You guessed it. No consensus was reached between Congress and the White House and now the ticking time bomb that is the fiscal cliff is staring all of us in the face.

So what are the major components of this?
The major components of the fiscal cliff are the expiration of the Bush tax cuts, ending federal unemployment benefits and social security payroll tax cuts. In addition, military spending and other domestic spending would be slashed. It would reverberate through the entire U.S. economy.

But I am not a federal employee, so why would I care?
Economists and politicians all agree if the proposed and mandated cuts come to pass, the country may be plunged into an economic abyss rivaling the 1929 stock market crash that turned into the Great Depression. It would make the recession of 2008 a bump on the economic road of America.

Can you give me more specifics on the cuts?
One of the provisions would put an end to last year’s temporary payroll tax cuts that resulted in a 2 percent tax increase for workers. Businesses would lose certain tax breaks for businesses, changes in the alternative minimum tax would increase, tax cuts from 2001-2003 would end, and there would be implications on Obama’s healthcare law. That’s in addition to the the massive cuts. Barron's said more than 1,000 government programs — including the defense budget and Medicare would be hit with "deep, automatic cuts."

What’s next?
That’s the trillion dollar question. Obama has scheduled meetings with leading members of both parties in the House and Senate and will attempt to thrash out a deal.

Options?
The government can allow the country to fall off the fiscal cliff and allow the spending cuts and tax increases to move forward. The plus side is the deficit, as a percentage of GDP, would be cut in half.
Or they can cancel some or all of the scheduled tax increases and spending cuts called for, but that would add to the bloated deficit, something Congress said it would never do. The middle course would opt to address the budget issues to a smaller scale, but that might have a modest impact on growth.

Is resolution probable?
Logic would say yes, but you never know. Some of Obama’s staunchest defenders have suggested that he not compromise, and try to bring Republicans to their knees under the impression that his winning a second term provides a mandate allowing him wide discretion to implement his political will.

What’s the likelihood that will work?
A good question for speaker of the House and longtime Obama jouster John Boehner and the president to answer in the coming weeks.

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