The fiscal cliff explained

    You’re a media-literate person. You read the New York Times, maybe, or you watch CNN. You listen to NPR, or perhaps you read articles by NBN's own Sylvan Lane. No matter what you read or watch or listen to, every media outlet is abuzz with talk of the “fiscal cliff," which everyone has agreed is, broadly speaking, bad. But you may be wondering this to yourself: What exactly is the fiscal cliff?

    What exactly is the fiscal cliff?

    So glad you asked. The phrase “fiscal cliff," popularized by Ben Bernanke, encompasses a number of different policy changes set to go into effect automatically on Jan. 1, 2013.

    What policy changes will happen?

    There are two broad categories of policy changes occurring: taxes go up and spending goes down.

    The changes to the tax code include the expiration of the Bush-era tax cuts, originally passed in 2001 and 2003. This means that marginal income tax rates (what you think of when you hear "income tax") on all Americans will rise. The cap on exemptions for the alternative minimum tax will fall (if that doesn't make any sense to you, don't worry; as a college student, you probably do not make enough money to worry about AMT) and the capital-gains tax (a tax on income earned through investment) will rise.

    In addition to those changes, the payroll tax holiday will end. The payroll tax refers to the section of your wages an employer withholds from an employee's paycheck in compliance with FICA. To reduce the tax burden on workers, this tax was reduced by two percent as a temporary measure, and will now return to its original level. Various Obamacare taxes will also go into effect, adding nine-tenths of a percent to the taxes of high-income earners.

    The spending changes primarily encompass cuts to Medicare, unemployment and government discretionary spending. First, the so-called "doc fix" ends. Medicare payments to healthcare providers will fall, and seniors, who frequently face difficulty finding doctors that will accept Medicare even now, will have increased problems finding medical care. In addition, federal unemployment benefits will return to their pre-stimulus form. This means that many people who receive unemployment benefits now will no longer get them.

    On top of those changes to entitlement programs, the sequester happens. This is enough of a headache to warrant a longer explanation later.

    Why Jan. 1?

    Well, despite the panic on Capitol Hill over the timing of the fiscal cliff, our lawmakers actually chose this date. A variety of different political concerns made the beginning of 2013 a prime date to automatically enact undesirable policies. Broadly speaking, putting tax increases and spending cuts immediately after an election kept incumbents from being hurt by political fallout and increased the probability that voters would simply forget they ever happened.

    But what about the sequester?

    The sequester is very different. Back in 2011, there was a political showdown over the debt limit, or "debt ceiling." In short, if Congress did not raise the debt ceiling, government would shut down. Some Republicans, especially in the Tea Party Caucus, thought this would be a good way to bring attention to the size of the national debt. Interested in staving off shutdown and wanting a major victory they could bring to the next election, Obama and Speaker of the House John Boehner strove to reach a “grand bargain” that cut entitlements and raised taxes in a way that would bring the deficit to manageable levels, hopefully closing the debt ceiling issue for the foreseeable future.

    That did not happen. Instead, we got the Budget Control Act of 2011, an ugly Frankenstein of an act that no one liked but everyone could tolerate. The debt ceiling was raised and Congress put into place a measure designed to force it to manage the deficit. This measure states that if Congress failed to produce a deficit reduction bill that cut $1.2 trillion dollars, then major cuts would go into place across the board in both defense and non-defense programs. These cuts would total about $100 billion in 2013. Bear in mind that discretionary spending in 2011 totaled only $1.3 trillion dollars, so this sequester would mean significant cuts to defense spending, education appropriations, transport funds and nearly everything the government does that isn’t Social Security or Medicare.

    Congress, of course, failed to create any sort of widely agreed-upon deficit reduction bill and is now frantically attempting to disable the time bomb it set.

    What happens to the economy if we go over the fiscal cliff and Congress can't reach a deal?

    The world ends.

    Well, perhaps not that bad. But the Congressional Budget Office confirms that the consequences of going over the cliff could be disastrous. For those of you who do not enjoy reading CBO projections, the short version is that our economy would actually shrink in the first half of 2013, and overall the CBO projects only half a percent of growth for 2013 if the fiscal cliff is not avoided. In all likelihood, the United States would undergo a second recession.

    What happens to me, as a college student, if we go over the fiscal cliff and Congress can't reach a deal?

    A second recession isn't bad enough for you?

    Let’s start with the effect of the sequester on college students. Federal assistance to students would be in danger. The Supplemental Educational Opportunity Grant and federal work-study programs would each suffer a spending cut of 8.6 percent. Research would also face significant federal cuts. All told, federal assistance at the three leading research universities in Illinois would be cut by $2.5 million.

    Outside of that, if you currently have a job or would like to have one, the CBO projects that the fiscal cliff would push unemployment back up to 9.1%, a loss of about 3.5 million jobs. If you maintain a stock portfolio, its value would likely collapse as consumer spending plummets and corporate earnings fall. If you hope to work in the federal government, stop hoping that, because the fiscal cliff would cut 277,000 federal workers and it’s highly unlikely that those jobs would come back anytime soon.

    Should I be worried?

    Eh, probably not. In all likelihood, the fiscal cliff will get kicked down the road to 2014, and Congress will spend the next year hashing out the details of a grand bargain. Boehner has already indicated he’s open to that idea. If not, Democrats will probably let America go right to the brink in an attempt to get Republicans to raise taxes on the highest earners. Obama, though, is unlikely to let America go over; conventional wisdom says the potential effects (both political and economic) are too unknown and dangerous to base a political strategy on.

    Even if Democrats do let us go over the edge, thanks to polling that suggests that Americans would blame Republicans, Congress would probably reach a deal that fixes the issue sometime in January, keeping us from experiencing the worst consequences of the cliff.

    On the other hand, conventional wisdom could be horribly, disastrously wrong. But if it is, we’ll all probably be too busy scavenging for gasoline and ammunition in the ruins of America to complain about it.


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