By Hannah Fahey
Budget Cuts Seen as Risk to Growth of US Economy
I'm sure all of us have heard recently about the fiscal cliff, and how bad it would be for the US economy to go off of it, but how many of us really know what the fiscal cliff is? I'm sure some of you guys that are hard-core government followers (you know who you are) know every last detail about this recent news, but for the most of us it’s quite confusing. As someone who has a pretty good understanding on what is going on in politics and keeps relatively up to date on current events, I was still confused until just tonight when I was reading this article and finally asked my dad what the heck was going on. So long story short, a year and a half ago, our congress created a bipartisan plan to help them agree on the budget by making it miserable for all members of the house, forcing them to make a decision. This sequestration would cut all government spending to a basic level and increase taxes to ridicules levels, making every person in the Untied States worse off.
Right now Congress is still arguing about what to do about the federal budget. This is because Obama and the democrats want to increase taxes while the Speaker of the House John Boehner and the Republicans want cut spending in order to raise revenue for the government. Nether of their proposed plans are quite as drastic as what would happen if the United States went off the fiscal cliff. If we went off the fiscal cliff it would definitely lead to another, probably worse depression but the fresh round of federal spending cuts set to take place next week would only cause a deceleration in the economies wavelength. These planned cuts are much lower than the sequestration would be, but it could reduce growth in the US economy by about a half a percentage point. Like we said before in class, although a half a percentage point doesn’t seem like that big of a deal, but when you put it in the big picture about how much growth we have and how much money we spend and have, it is a very large number, and consequently going off the fiscal cliff would stunt economic growth to more than 3 percent.
Although consumer consumption was very strong last year, it has already weakened early this year due to the foreseen effects the fiscal cliff will have on all citizens so people are deciding to save their money. As we learned about in class the multiplier has a ripple effect on the entire economy with increased spending, well a negative multiplier still has a ripple effect on the entire economy, but it has an opposite effect. Although these cuts in government spending will have an effect on the economy as a whole, the negative multiplier that would take place due to America going off its fiscal cliff would be so much worse off. Although congress is starting to take some steps to balance the budget, they need to do something fast to make sure there is no possible way for us to go off the fiscal cliff.
Sequestration: the policy agreed upon in congress, automatic form of spending cuts if congress cannot reach a decision.
See http://www.auburn.edu/~johnspm/gloss/sequestration for more details.
Negative Multiplier Effect: Instead of an increase in spending having a ripple effect on the entire economy, a decrease in spending has a opposite ripple effect on the entire economy.