Fiscal Cliff is the latest buzz word in US and if it is bothering US the whole world has to be obsessed with it and so it it. The US economists are debating how should the govt deal with it and the Republicans are trying to use it to cut a bargain with Mr. Obama. What is this fiscal cliff that has stolen the attention away from EU and its economic mess. It refers to the expiry of massive tax cut introduced during Bush administration as well of a no. of concessions and stimulus measures introduced during Obama regime in January 2013. Plus the deficit reduction plan as part of the debt ceiling deal struck in August 2011 are scheduled to start from January 2013. So US with its fiscal cliff is eyeing too massive- too soon deficit reduction of a around $600 billion.
What is interesting is that as per a survey a large chunk of US population believes that fiscal cliff will result in deficit increase and they can't be blamed for this misinterpretation. They are under this impression as the same deficit hawks who were crying over USA's 1.1 trillion $ deficit are now crying most loudly over fiscal cliff. Is it because suddenly they have realized that deficit reduction can be disastrous for a depressed economy or because the largest chunk of deficit reduction in this fiscal cliff comes from expiration of tax cut for the ultra rich. Since they are demanding a deal on fiscal cliff in which they want to extend the tax cut the reason has to be the latter one. Now the question is why do they believe they can have a deal and president Obama will give in to their demands. It is because along side the tax cut on rich a no. of stimulus measures of Obama regime are also expiring as well as the deficit reduction plan that will cut social security spending are also scheduled to set in. This will heard the middle and low class who are already hurting due to depressed economy. So, Republicans are sure president Obama will make a deal with them to postpone the execution of debt ceiling deal.
Both the sides are proposing deals. While Republicans want a rise in medicare age as well as reduction in social security spending along side the extension of Bush era tax cut to clinch a deal. On the other hand President Obama is keen on continuing the social security spending, implementing health care scheme and extending Bush era tax cut to upper middle class but, insists that wealthiest of Americans should pay proportionately. With negotiations going on vigorously a deal is expected in few days i.e. before the cliff sets in.
The big worry over fiscal cliff is because with US economy already recovering meekly any cut in spending will make the situation worse. Multipliers work both way and now even IMF acknowledged in its latest world economic outlook that multiplier effect is larger than it earlier anticipated in the depressed economies i.e. every spending cut depresses the economy further by more than the amount of cut. This is not what the world expects at this point when Europe is already struggling and the drivers of growth i.e. developing countries are hanging to growth by a straw. So, US policy makers need to get over with negotiations over fiscal cliff and cut a deal that saves the economy from going into downward spiral. Its not that US does not need to move towards lesser debt and deficit it is just that this is not the best time for deficit reduction. During depression govt doesn't crowd out private investment rather it encourages it. So, austerity should be saved for boom and let prosperity return to world economy.
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