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Cliff notes

Adam Newman | Monday, December 3, 2012

The fiscal cliff is a combination of automatic tax increases and spending cuts, all scheduled to start Jan. 1, 2013. One component is the expiring “Bush tax cuts,” or $4 trillion in temporary tax measures passed in 2001 and 2003. Another component is the “sequester,” the consequence of the famous “super committee” failure to reach a major deal. The sequester, $2 trillion in automatic cuts to defense (something Republicans dislike) and to social programs (something Democrats dislike), was supposed to give members of the committee an incentive to reach an agreement. The super committee could not reach an agreement, however, forcing the sequester to begin Jan. 1. There are other smaller, but still significant provisions, such as the expiration of the payroll tax cut, physician Medicare reimbursement cuts and the expiration of unemployment insurance extensions, all starting on Jan. 1.  

Amidst this policy uncertainty, the nation’s debt ceiling, which currently stands at $16.3 trillion, will be “hit” by the end of the year. Raising the debt ceiling is not a question of spending more money, but allowing the Treasury to borrow money to meet its current obligations. Not raising the debt ceiling would lead to a default, the most irresponsible fiscal measure that any country can pursue.

Even before it started, the fiscal cliff has weakened the American economy through tremendous uncertainty. This uncertainty has delayed decision-making on investment and hiring for small businesses and corporations. The actual implementation of the fiscal cliff, though, would be devastating. According to the non-partisan Congressional Budget Office, the fiscal cliff would cause the American economy to contract at a rate of 5 percent (leading to a new recession) and increase  unemployment from 7.9 percent to 9.1 percent. If America went off the cliff, the stock market would plunge, interest rates would begin to rise and faith in the American economy would be shattered.

Deficit reduction is necessary for our country’s fiscal future, but the methods of the fiscal cliff are misguided because massive deficit reduction policies should not be implemented immediately. The budget deficit would be smaller, yes, but America would face a situation similar to the eurozone: A recession with weak projected growth and high-budget deficits. The optimal course for America is to stimulate the economy now through short-term government spending, but couple it with long-term balanced deficit reduction that begins in small doses and increases as the economy strengthens.

There are countless scenarios for the fiscal cliff’s outcome. Amongst all the options, a policy consensus is beginning to emerge: Avoid the cliff by passing a deficit reduction package of approximately $4 trillion with 25 percent coming from increased tax revenues by broadening the tax base and eliminating loopholes, and the other 75 percent coming from cuts to entitlements, social spending and defense. This is the framework of the “Simpson- Bowles” plan that has received support not only from the policy and business communities, but also from liberal, moderate and conservative members of Congress.

Will we go over the fiscal cliff and see unemployment rise, the economy weaken and economic confidence fade? Given everything that has happened over the past few years, it is largely reasonable to think America will squander the opportunity created by the fiscal cliff. As the countless political pundits offer their takes on the outcome, I look to a perspective offered by Alexis de Tocqueville, whose famous tour of America in the early 19th century, chronicled in “Democracy in America,” is still an inspiration for Americans today. Tocqueville said that in the United States, “events move from the impossible to the inevitable without stopping at the probable.”

Adam Newman is a senior political science major. He can be reached at anewman3@nd.edu

The views expressed in this column are those of the author and not necessarily those of The Observer.