Fiscal Cliff

Generali

To go back to the OP, here's my opinion, simplified for ease of consumption.

The US has a law in place which limits the amount that the Treasury can borrow and a little over a year ago that limit was reached for the umpteenth time. Normally that limit is raised with little debate but that time around there was a Republican majority in the US 'Parliament' who wanted borrowing contained and a Democratic President who wanted the US Government to continue to spend more than was being brought in through taxation. Both have to agree for the rise in the borrowing limit to occur and they couldn't agree.

The US Government would have run out of money as they'd passed a budget to spend more than taxation but they were unable to borrow the money required.

As agreement couldn't be met both sides agreed an interim measure which raised the borrowing limit but also meant that if agreement on how to proceed couldn't be reached a year or so later then a series of automatic tax rises and spending cuts would kick in automatically. These were designed to be equally hateful to Republicans and Democrats.

Now we're a year down the line and the 'fiscal cliff' is about to kick in. The fiscal cliff is the mix of spending cuts and tax rises (or more accurately an end to time limited tax cuts). The 'fiscal cliff' will mean a small tax rise for most working Americans although a bigger rise for higher earners and a pretty steep rise in capital gains tax.

The cuts in spending fall largely on defense and welfare. In the US, unemployment benefit is only paid for a limited period (100 weeks?) and that was temporarily extended. That extension is one of the spending cuts coming in as is a smallish cut in health spending for poor people (Medicare). Health spending on old people (Medicaid) I believe is untouched.

HAMISH_MCTAVISH

Generali wrote: »

The cuts in spending fall largely on defense and welfare. In the US, unemployment benefit is only paid for a limited period (100 weeks?) and that was temporarily extended.

It would result in unemployment benefits to about 3,000,000 Americans ending pretty much immediately.

That's a lot of people, almost all of whom will have no recourse to any other form of state support.

The estimates of impact vary.... But they're all pretty much horrific.

It breaks down as $500 billion in tax increases and $200 billion in spending cuts which is equal to about four percent of GDP.

This would plunge the USA, and probably the global economy, back into recession.

Unemployment would be expected to increase to between 9% and 11%, or roughly a 50% increase from today's levels.

And of course, many of those people would have no recourse to benefits at all, thanks to the cut in unemployment benefit.

PaulF81

And I bet the US in 10 years time is light years ahead of socialist Europe. Tough love now, rewards later instead of beeding the country dry.

HAMISH_MCTAVISH

For anyone interested in the details, this is a pretty good article....

What is the fiscal cliff in one sentence

Much too much austerity, much too quickly.

And.....

If it’s not a cliff, what is it?

The term “fiscal cliff” comes from testimony Fed Chairman Ben Bernanke delivered before Congress earlier this year. But, as we mentioned, the “cliff” imagery has sparked some dissent. The Center on Budget and Policy Priorities thinks it’s more of a “slope.” The Economic Policy Institute calls it an “obstacle course.”

We at Wonkblog call it the “austerity crisis.”

That solves two problems.

First, the danger the economy faces is too much austerity too quickly, so swapping the term “fiscal” for the word “austerity” actually better reflects the situation.

Second, while we don’t know if it’ll be a cliff or a slope, we do know that it will, if permitted to go on for long enough, be a “crisis.”

Thus, the “austerity crisis.”

http://www.washingtonpost.com/blogs/wonkblog/wp/2012/11/27/absolutely-everything-you-need-to-know-about-the-fiscal-cliff-in-one-faq/

Generali

HAMISH_MCTAVISH wrote: »

It would result in unemployment benefits to about 3,000,000 Americans ending pretty much immediately.

AIUI the US laws allow long term unemployed to access their 401K which should enable body and soul to remain together. A resolution will be negotiated sooner or later. After all, how bad were things last time despite all the shouts from the newspapers?

HAMISH_MCTAVISH

Generali wrote: »

AIUI the US laws allow long term unemployed to access their 401K which should enable body and soul to remain together.

Gen, not being funny or anything, but many if not most of the long term unemployed will already have used up that facility a long time ago.

A resolution will be negotiated sooner or later.

Oh, I totally agree they'll come to a deal and avert the worst consequences.

American politicians are completely bonkers, but at the end of the day they need to get re-elected and that's all that matters.

After all, how bad were things last time despite all the shouts from the newspapers?

Well, the political games cost them their AAA rating (which had no impact on borrowing costs), but other than that dent in their pride, not too bad.

Graham_Devon

We've talked about what it means, but no ones talking about what happens if they simply extend it again.

Will we not reach the very same conclusion approahing 2014? Only difference being borrowing is even higher due to cuts not kicking in?

HAMISH_MCTAVISH

Graham_Devon wrote: »

We've talked about what it means, but no ones talking about what happens if they simply extend it again.

Will we not reach the very same conclusion approahing 2014? Only difference being borrowing is even higher due to cuts not kicking in?

Not really.

What they need to do is negotiate a long term deal to unwind the stimulus as the economy recovers.

The current short term deals don't do that, and nor does simply letting them all expire.

As with all these stimulus programmes worldwide, they will need to gradually be reduced and eliminated over many years as the economy recovers and they are no longer required.

The danger is in withdrawing them prematurely, and undoing all the good work that has been done so far to get economies out of recession.

Graham_Devon

HAMISH_MCTAVISH wrote: »

Not really.

What they need to do is negotiate a long term deal to unwind the stimulus as the economy recovers.

The current short term deals don't do that, and nor does simply letting them all expire.

As with all these stimulus programmes worldwide, they will need to gradually be reduced and eliminated over many years as the economy recovers and they are no longer required.

The danger is in withdrawing them prematurely, and undoing all the good work that has been done so far to get economies out of recession.

Aye, I'd agree. But were not withdrawing any stimulus yet....are we? Were simply doing more?

At what point does sustainability come into the equation?

It would be very easy to do what you suggest. One could say too easy. Just keep pumping until it's sorted out....however, you are never going to sort it out if you can't see the wood for the artificial trees.

PaulF81

What amazes me is the fact that if this had affected single countries, they would have been complete and utter toast. In some ways, the global nature of this crisis has saved our bacon; the extent of the stimulus that we have gotten away with has been possible for no other reason than every major western economy has been fragged.

All we need now is the chinese to implode in a credit crunch and we can all live happily ever after in some socialist stimulus sugar rich keynesian global commune.