Dec. 7 marks only 25 negotiating days remaining until the fiscal cliff. If lawmakers do not work out a compromise they can live with by Dec. 31, the Bush tax cuts, which were set to be temporary, will expire, and automatic across-the-board spending cuts will begin.
The tax increases and spending cuts would total $607 billion.
Legislators set this scenario up, and they can dismantle it. They set an artificial deadline when they were unable to agree on a way to reduce the federal deficit. They still appear to be deadlocked.
It is not just gamesmanship. Republicans and Democrats have genuinely different ideas about the role of government and about the best medicine for the still ailing economy.
According to Catherine Bonser-Neal, associate professor of finance at the Kelley School of Business Indianapolis at Indiana University (IU), it is important to deal with the deficit, but the way in which it is dealt with has both long- and short-term impacts on the economy.
“The balancing act being examined by members of Congress is how to minimize the short-term economic-growth impacts of a cut in the budget deficit against the longer-term need to reduce the level of U.S. debt as a share of the economy,” Bonser-Neal said, according an IU news release.
“However, history and economic research suggest that a preference to avoid short-term pain should not be put ahead of the need to address the country’s long-term debt problem,” she added.
If a country’s debt exceeds a certain proportion of its income, resources have to be diverted to servicing the debt, paying interest on it, and paying it back.
The resources that are devoted to the debt are no longer available for investment, and real economic damage is done, according to Bonser-Neal. A country could become insolvent with too high a ratio of debt to income.
