One does not need to be the Fed Chairman or even have a doctorate in economics to know that the fiscal cliff is going to be bad. The simultaneous rise in taxes and the fall in government spending will have multiple effects on the economy and both will dry up the economy from both ends. The supply side economics that US so famously follows will feel the pinch leading to fall in much needed government benefits that shore up some of the less privileged people of the economy.
On the other end, the rise in taxes will also leave many people with less disposable income which means less money circulating in the economy and less monetary based development. The deadlock that has persisted on the Capitol Hill till now has shown the ideological stigma that is associated with the issue. The diametrically opposed philosophy of fiscal conservatives and liberals has led to a gridlock and the no holds barred approach taken by both sides will make the American nation and its economy the primary victim.
Republicans want the Bush-era tax cuts to remain in place and they have certain leverage when it comes to this part of the deal. In order to make them compromise on this primary trump card that they hold, they want the Democrats to cut down on some of the essential benefits that they have allowed. The political bickering has seen both sides claiming that they are protecting the interest of the people. Democrats say that the benefits are necessary for the people who cannot afford them and so the government has the responsibility of footing the bill while Republicans claim that tax cuts lead to job creation which can stimulate the economy.
Even people seem to be divided over the solution. The elections held on 6th November were considered a referendum on many issues in addition to the fiscal cliff and it seems that the people want the status quo to stay in power and solve this problem. By having the same Democratic president and senate with a Republican House of representatives majority shows that the trust is being rested with the leaders who got the country into this mess.
So what now?
Well, there seems to be a unanimous agreement that the issue needs to be solved. The financial markets, the people of America and even the president has said that there needs to be a solution before the country suffers any further. The Congressional Budget Office has joined these voices by saying that not only will the economy suffer but there could be a recession following the event leading to unemployment and economic slowdown.
The dual effect of the fiscal cliff will have other effects as well where financial markets will take a tumble and there would be huge repercussions in the commodity and equity markets around the world. Bond markets will also take a hit as the US debt will now be seen with less optimism and more lending would become more expensive for the country unless further fiscal measures are taken. The impact of all this mess will be disastrous for the world economy which is already reeling from the eurozone crisis.
The solution seems simple and in one context, inevitable. It is expected that unless a deal is reached between the two sides, the fiscal cliff would be triggered and so on 1st of January, the tax would rise on the whole country and the benefits would be withdrawn altogether. This means that at this point, inaction is also not an option and a solution should be reached sooner rather than later. Seeing all these circumstances, the inaction seems insane from a fiscal and economic point of view. However, one forgets the political implications from this crisis and the fact that it seems political ideology is taking precedence again. The solution now depends on the games being played at the highest level and see who blinks first and gives in…