The fiscal cliff is, put simply, the cause and effect of several acts and economic laws being passed and revoked around the end of 2012. With the ending of such acts like the bush tax cuts, and the shift of minimum taxes, the goal is to help stabilize the long term economy by paying back a lot of the public debt, how ever because of the many contraction laws being put into place all at once into effect, theories that the enactment of such things, while helping long term economy, will knock us back into a recession. Without proper legislative action many fear that the cut in spending and the rise on taxes will not be good for the short term economy, and are currently tackling how to deal with this "fiscal cliff" before the end of the year, many of which options presented so far are not too appealing.
The problem is that if the bills are allowed to be passed unhindered, the Congressional budget office estimates that the deficit would be cut nearly in half and stabilize a economic future involving reduced deficit for the years to come, however, this is theories tend to have a major inverse impact on the short run economy. However, it is thought that if the acts and laws are changed and or tampered with, the long run economy would suffer with rapid increasing deficit over the next 10 years and affecting interest cost with a staggering effect. Because of this choice between short run for long run economic "ruin" it's become a major problematic situation, so much that it coined its own off hand name (fiscal cliff)
Some consider alternative measures, such as extending the bush tax cuts, or focusing on employment for the short run, some even see it as a necessary pain to suffer in order to fix the deficit, and despite its potential effects on saving the long run economy, many cant see it favorable to leave things as it is. Higher taxes, less government spending, less unemployment benefits, all at the same time would be crashing an otherwise growing GDP.
The fiscal policy has two types of policies, which are the expansionary and contractionary policies. The expansionary policy is a decrease in taxes, which causes the government's budget deficit to increase. The contrationary is the opposite it's an increase in taxes, which causes the government's budget deficit to decrease. Keynesian believed that expansionary and contractionary fiscal policies can be used to influence macroeconomic performance and the economy couldn't be fixed without any government assistance. These changes in taxes can have a massive effect on the economy. If taxes increase it can encourage workers to work more hours or it can discourage them to work less but some people might not have the flexibility in their schedule to increase their work load. Also they can become less efficient and productive at work because of increases in taxes.
Corporations can be affected by taxes as well; if they lower taxes for them it can encourage an increase in business fixed capital investment spending and will lead to a rise in the nation's capital stock and the capital stock per employee. Spending and taxation can be used counter cyclical to help smooth out some of the insecurity of real national output mainly when the economy has experienced an external shock.
Automatic fiscal changes are changes in tax revenues and government spending rising automatically as the economy moves through different stages of the business cycle which is known as the automatic stabilizers of fiscal policy. The Keynesian school debates that fiscal policy can have dominant effects on aggregate demand, output and employment when the economy is operating well below full capacity national output, and where there is a need to provide a demand stimulus to the economy. Keynesians believe that there is a strong and reasonable role for the government to make active use of fiscal policy measures to achieve the level of aggregate demand. However, monetarist economists believe that government spending and tax changes can only have a temporary effect on aggregate demand, output and jobs and that monetary policy is a more effective tool for controlling demand and inflationary pressure. A rational expectation of tax cuts is the government sells debt to fund a tax cut or an increase in spending, and then a normal individual will recognize that at some future date he will face higher tax liabilities to pay for the interest repayments. This will lead to people saving money but any change in fiscal policy will have no effect on the economy if everyone is rational.
This is how the president is handling the fiscal cliff, which had a big impacted on the middle class. President Obama is trying to find a way to not go over the fiscal cliff, which happen after last year debate on the debt ceiling. President Obama was trying to sell the solution for the fiscal cliff to congress and he also said Republicans need to extend the bush tax rates on household that are making less than 250,000. So middle class can have the tax cut and then the upper class can handle the tax increase.
President Obama and the congress are working on fixing the federal budget deficit and he is attacking this situation with a strategy of balance. To fix the national fiscal order and important public people has been working more about the tax side issues. They were discussing President Obama spending priorities. Also some people think that President Obama has not really explain much about the federal spending and where his focus of his plan. Jonathan Weisman said "It was important to engage the public on taxes, other say he has not prepared the country for the sacrifice that come with lower spending". (Weisman, 2012) There are some Republican leaders saying that President Obama was more worry about campaigning, then about fixing the problem. They think the best strategy is to raise tax revenue with the closing of loopholes.
Even through the republicans didn't have faith in the President, and thinking the President was not serious about the problem. President Obama was still able to get the programs he wanted appointed. Like "$340 billion for health care entitlement program savings and $272 billion in reduction" (Weisman, 2012). These actions show how the president can make decision even at the hardest times.
In conclusion, the fiscal cliff is the result of soon to be expired tax cuts and cuts on the government spending, aimed to take place on December 31, 2012, since letting these two events to continue operating will have a negative effect on our economy that, although is going towards a good direction, it is still in a bad spot at the moment. There is some risk being taken to achieve the goal of stabilizing the economy by paying back a great portion of the public debt. There are some measures that can be taken in order to minimalize the impact on the economy, some being extending the bush tax cuts, but what the public should understand is that we need to go through s rough patch in order to fix the deficit. There are two ways it can be classified, expansionary and contractionary, the first one being the one that decreases taxes, which will result on the government's budget deficit to increase while contractionary resulting on the opposite,
President Obama main focus is to help the middle class by allowing to extend the bush tax rate, which is an example of a expansionary fiscal policy, for those with an income less than 250,000 so the upper class deals with the tax increase, which will help the American people to go through this without any major problems considering than most of the American people is middle class.
