More than a week has passed since the re-election of President Obama. We are happy to breathe a collective sigh of relief, especially as we are no longer subjected daily to the storm of campaign advertisements, political rants from our Facebook friends and cringeworthy election-themed parties. But the president and the nation inevitably face a steep uphill climb back into economic prosperity. Let's pick up the leftover confetti and make our last jokes about Big Bird - a new and potentially fiercer battle is on the horizon.
It's called the fiscal cliff. By the time January rolls around, it is guaranteed that we will be sick of hearing about this neologism. However, it's an important concept that essentially amounts to a ticking time bomb for the national economy. If the president and Congress do not strike out a deal by the end of this year, there could be dire consequences.
Without action, it will play out like this: On Dec. 31, granted we haven't already perished from the Mayan apocalypse, the Bush tax cuts are scheduled to expire. This will inevitably place an additional tax burden on everyone, from the top one percent to blue-collar workers. According to Forbes, it is estimated that the average household will pay $3000 more in taxes annually. Payroll taxes will also increase by 2 percent. But this is just half of the monster known as the fiscal cliff. In accordance with the August 2011 deal Democrats and Republicans struck to prevent the United States from defaulting on its debt, deep budget cuts will go into effect Jan. 1 , including a $55 billion cut to the Department of Defense. This combination of tax increases and budget cuts, slated to happen in a two-day span, could put a stain on the president's second term even before Inauguration Day.
So why are Americans concerned about whether Congress and the president can work out a deal to avoid the fiscal cliff? After all, the fiscal cliff, in theory, could very well reduce our astonishingly high national debt. Economist and New York Times columnist Paul Krugman assures us that "the fiscal cliff is not really a cliff." Some have even suggested calling it an "austerity bomb," since the ensuing fiscal tightening is predicted to hurt economic activity. The Congressional Budget Office reports that a recession is very likely to occur in the first months of 2013 and increase unemployment to 9.1 percent, assuming policymakers do nothing. While Krugman and his colleagues are probably correct in claiming that the fiscal cliff would not destroy the American economy, they underestimate the scary power of the social perception of economic harm.
Additionally, many American and foreign investors could suffer greatly from the effects of the fiscal cliff. Only one day after Obama's re-election, the Dow Jones Industrial Average plummeted to its lowest level of the year, followed by losses in NASDAQ and Standard & Poor's, two of the world's largest benchmarks of equity performance. This attests to the general, though perhaps premature, fear that investment, a driving force in any economy, could be hurt by the prospect of the fiscal cliff.
Significant questions remain as to the best deal that could satisfy the Republican-controlled House and President Obama. This is where politics come into play. Republicans favor cuts to entitlement programs like - you guessed it - Obamacare. Obviously, this won't fly with the president, who has advocated an extension of the Bush tax cuts for all except the rich. But Republicans have opposed tax hikes, even for the very wealthy. Can the two sides arrive at a "grand bargain" that will satisfy both the legislative and executive branches?
For the sake of the American people and their economy, they must. Even before Obama prepares for his second inauguration address, he should work to make sure his second term isn't marred by an avoidable economic recession. Avoiding the fiscal cliff is the only way to do this.
Editorials are written by The Herald's editorial page board: its editors, Daniel Jeon and Annika Lichtenbaum, and its members, Georgia Angell, Sam Choi and Rachel Occhiogrosso. Send comments to editorials@browndailyherald.com.
