The Fiscal Cliff Ahead

July 10, 2012

In the coming months, rhetorical promises will increase and the likelihood of action to protect the economy will decrease. Congress and the president are headed into the election season without a plan to avert what has been deemed “the fiscal cliff,” which, according to a number of sources, may be behind the slow hiring and faltering recovery.

This “cliff” is created by an expiration of tax cuts for the middle class, protection of the middle class from the Alternative Minimum Tax, significant decreases in Medicare’s doctor payments, and more. Together, the cliff stands to siphon $500 billion from the economy and could cause another recession according to the Congressional Budget Office.

While many in Washington can agree that the situation is dire and needs to be addressed, Washington has yet to agree how to avoid it. Yesterday, President Obama announced a call to extend a portion of the expiring tax cuts, but only to those making below $250,000 dollars, putting him at odds with Congressional Democratic leaders who have called for cuts for those making up to $1 million dollars. Meanwhile, Republicans have called for an extension to all the expiring cuts that White House Press Secretary Jay Carney has said the president is “100 percent” against. With so many issues around expiring the cuts, the private sector is concerned about the lack of a planaccording to the National Association of Manufacturers (NAM).

In a recent statement the NAM pointed to a lack of certainty on future fiscal action as the cause behind a lack of hiring in the manufacturing sector last month, which contracted for the first time in three years. Jay Timmons, chief executive and president of the NAM, had this to say:

Congress and the administration’s inaction has led us to a fiscal cliff, and any further delay in forcefully dealing with the problem will only worsen the economic fallout that the United States is facing.

And the NAM is not the only one pointing to fiscal policy as the reason for weak job gains. Federal Reserve Chairman Ben Bernanke has called on Congress to act numerous times to avoid further speculation on the fiscal cliff, saying a “sudden and severe contraction in fiscal policy” was a risk to what recovery the country has made. Click here to view our blog on the differences between monetary and fiscal policy.

With so many different advocates for action now instead of during a lame-duck session, Congress and the administration are ignoring an issue that could potentially undo any recovery the economy has made so far. If Washington values the country and not just the next election, they will act sooner rather than later.

 

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