The “fiscal cliff,” as it is known in Washington, remains poorly understood outside Washington, because it is technical and political and unrelated to adultery. But it’s important, because unless President Obama and Congress can work out a deal to avoid the cliff by January 1, the U.S. could plunge into a recession. Here are answers to a few basic questions about a crisis Washington forced on itself:
Would going over the fiscal cliff expand the deficit? No, it would shrink the deficit. The Bush tax cuts would expire, increasing revenues. Federal spending would be reduced by $1.2 trillion over ten years—half from the military, half from the rest of the government—decreasing costs. Unfortunately, austerity in the form of higher taxes and lower spending would make a weak economy weaker. Even Republicans who have spent four years arguing that spending cuts would boost the economy are now warning that Pentagon spending cuts could tank the economy.
Is someone trying to raise taxes on the middle class? No, Obama wants to extend the Bush tax cuts on income up to $250,000, while the GOP wants to extend them for income above that as well. But in 2010, Republicans refused to extend the tax cuts for the bottom 98% unless Obama agreed to extend them for the top 2%. The president agreed last time, but he has promised not to do that again.
Doesn’t everyone have an incentive to compromise? Not necessarily. House Speaker John Boehner could face a leadership challenge if he tries to cut a deal with Obama, while Senate Minority Leader Mitch McConnell could face a primary challenge. Politically, obstructionism worked for the GOP in 2010. Meanwhile, the president could actually strengthen his hand by letting the Bush tax cuts expire and then proposing new “Obama tax cuts” to replace them. And the “cliff” does not have to be as steep as it sounds; even if the politicians fail to reach a deal before January 1, they can always agree to reverse the spending cuts later.