The election was barely over and already we had lurched onto our next “crisis”, the suddenly looming “fiscal cliff”, a combination of tax increases and spending cuts that are set to take effect all at once at the end of the year. The “fiscal cliff” is a poison pill crafted by the White House and the Republicans to force both parties to come to terms after the election. The net effect of higher taxes and reduced government spending will have disastrous consequences on our already fragile economy, it is said.
But will it really? Most economists have described it as more of a slope than a cliff, because government spending is spaced out over the year, and higher payroll deductions can always be postponed for a while. When you look at the details, the poison pill doesn’t seem so bad. The Bush-era tax breaks that are set to expire disproportionately benefit the rich anyway. Tax rates would simply return to those of the Clinton era, an era of prosperity and balanced budgets. Half of the spending cuts would apply to the military budget, already too high many would argue and larger than the rest of the world’s combined. Medicare and Social Security will not be touched.
Then again, recessions are often triggered by the perception of the economy, not necessarily on reality. The uncertainty resulting from this unresolved media-hyped crisis may cause businesses to be overly cautious in investment and hiring decisions. Everyone will be hedging their bets waiting for the inevitable crash. Plus, government spending does have a tangible effect on the economy. As egregious as runaway spending by military contractors may be to some, everyone agrees that that many jobs are created, and many in states that have few other industries to employ their population. With unemployment already so high, perhaps now is not the time to make such cuts.
So what is the right answer here? Join us at the next SFDebate to explore and debate this question.
*** If you are interested in speaking or moderating, let the event organizer (Roy) know. ***
Links for further reading: