Hello I am worried about this fiscal cliff that is looming in our horizon. I am frustrated with politicians and I honestly don't know who to believe. One party says we must increase taxes the other says we must cut spending. One part says tax cuts create jobs the other says that's all lies. Which party is actually right and if we do go over the fiscal cliff will our country turn into greece or worse?
Like most economic things in politics, the "fiscal cliff" is just a nonsense term to turn something kind of abstract into an issue that politicians can manipulate public opinion about.
The "fiscal cliff" is really more of a political cliff. Basically, the fiscal cliff refers to a partisan disagreement within government over how to handle fiscal policy. There really isn't any "cliff" (a word implying an upcoming mortal danger). Instead, what we have is a deadline: Dec. 31, 2012. That is the deadline that the members of government have to make a decision on how to handle fiscal policy. There's three primary sides to this argument.
1) The side that wants to maintain a specific set of tax reduced taxes, believing that these relatively low taxes will help stimulate growth.
2) The side that wants to pay off the national debt, believing that the US is going to be incapable of paying off the national debt should be wait any longer to cut spending.
3) The side that wants to increase stimulus spending to cause economic growth.
There are also a large number of politicians that combine these ideas. There are some who believe in #1 and #2, or #1 and #3, or #2 and #3. Everyone in government is running around confused and scared because none of them really seem to have a grasp on what their options are and what the economic implications will be. They're all so confused that they're reverting back to their stated campaign ideologies of "tax cuts for the rich" or "expand the safety net", etc. They're still politicians, though, so no one seems to be missing an opportunity to ensure that they include plenty of financial gain for themselves and those contributing to their campaigns.
The reality is that Dec. 31, 2012 is not the end of the world. It's the deadline for an important decision, yes - a decision that will have long-term and short-term consequences, and has the potential for the decision-makers to make a bad choice.... but not the end of the world. More than anything, this is just an extension of the budget battle we went through last year.
The real problem is that the people in government aren't asking the right questions. They keep asking about spending and taxation rather than asking how they caused this mess in the first place. They're still fighting the same fights over how to distribute assets rather than looking at ways to improve asset management. Metaphorically speaking, they're arguing over the best way to fix the economy using the wrong tools. As the result of this, it really doesn't matter which decision they make because the influence on the economy will be minimal at this point, anyway. The amount of actual money we're talking about in the fiscal cliff isn't enough to have any sort of long-term significant impact on economic health. In the short term, the focus should be on economic growth, but the reality is that the economy is already growing again, slowly, so even that could only help to speed up the process a bit. Nice, but not necessary. The option of paying-off debt, on the other hand, are inappropriate given the timing. It's definitely something I support and promote during a boom cycle to ensure that the government is decreasing their interest costs and improving future potential in fiscal management, though. Tax cuts on the rich and businesses.... well, it really depends on the individual tax. People lump all taxes together but the truth is that the economic impact will depend on which tax you're changing. Lowering income taxes on the rich doesn't help anything; it just makes them richer. That was recently proven by a study commissioned by the GOP. However, giving specifically targeting activities such as venture capitalism and speculative investing during a boom cycle, when investor confidence is high, can make capital available to small, new, and otherwise risky companies stimulating innovation and research. The tax cuts being proposed during the fiscal cliff issue, however, are for the most part inappropriate under any circumstances; they are just the same-old attempts to get "something for nothing" and allow the rich to mooch off the rest of the nation without actually contributing anything themselves.
So, hopefully that helps clear up the fiscal cliff a bit.