Why We Absolutely Need The Fiscal Cliff, Or Something Like It

For several weeks, especially since the election ended, the media has been focusing its attention on the coming fiscal cliff. Most reporting talks about one thing: that the cliff will push the country into another recession. What very few stories mention is that the recession would be short, that it would balance the budget and set the economy up for expansion.

That is the opinion of the non-partisan Congressional Budget Office, which has been publishing economic projections for Congress since 1985. It puts out two scenarios: a baseline, in which the current economic policies continue, and an alternative, which considers other popular policies. Its latest publication makes it clear that the fiscal cliff is bad for the short term, but necessary for the long term. The alternative scenario, in which we avoid a fiscal-cliff-type of event, would have the public debt rise to 90% of GDP — levels unseen since WWII.


Source: The Committee For A Responsible Federal Budget. Credit: Lam Thuy Vo / NPR


The current debt level is at 77% of GDP  — the highest since 1950. If the fiscal cliff does happen, over the next decade that figure would drop to 58%, instead of rising to 90%.  (Which is still not good since, historically, it’s been around 40%.) Before that would happen, however, the economy would go into recession in 2013 and the unemployment rate would rise 9%. But, the next year, the economy would start to grow again, unemployment would drop to 5.7% by 2017, and further to 5.0% by 2022. Alternatively, without the fiscal cliff, says the CBO:

Ultimately, the policies assumed in the alternative fiscal scenario would lead to a level of federal debt that would be unsustainable from both a budgetary and an economic perspective. — From “An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022“, by CBO

Austerity measures are desperately needed, and it’s quite amazing that a do-nothing Congress as polarized as this one was able to pass a pretty good solution to our budgetary woes in the form of this fiscal cliff. But it’s clear that even it won’t be good enough: the national debt needs to drop even further. This becomes obvious after realizing that the fiscal cliff provides only 0.5 trillion extra funds, on a 4 trillion dollar budget. Ten years ago, the budget was 2 trillion. Five years ago, almost 3 trillion. The fiscal cliff would see that 4 trillion dollar budget shrink by just 2.5%, when it really should shrink ten times as much.

When Clinton left office in 2000, public debt was projected to be zero in 2012 — instead it multiplied five times over. If Congress and the President come to an agreement to avoid the fiscal cliff, it should be only to make even deeper budgetary cuts.

See also:

From CBO and NPR


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