Obama's Win Means for Fiscal

¶ … Obama's win means for fiscal cliff" by Sahadi (2012) talks about the effects of the Budget Control Act, should it come into force on January 1, 2013. The cliff is a series of mandated tax cuts, like the payroll tax holiday and the Bush tax cuts, along with a series of spending cuts. The spending cuts would affect extended unemployment benefits, reimbursement cuts to Medicare doctors and cuts to both defense and non-defense spending (Ibid).

It has been estimated by the Congressional Budget Office that the fiscal cliff would plunge the country back into recession. Fiscal policy is one part of macroeconomic policy, the other being monetary policy. The Fed has limited capability to improve the economy because interest rates are already low and it has already implemented multiple rounds of "easing," or open market operations designed to pump money into the banking system. This leaves fiscal policy as the most important mechanism for government to influence the economy.

The GDP is the total of government spending, consumer spending, business investment and net exports. The fiscal cliff affects government spending primarily, by reducing it. The fiscal cliff also raises taxes, leaving less money for business investment. The direct impact of the fiscal cliff would be to reduce the GDP because it would reduce G. And I. However, it would also subject to multiplier effects, and these are where the real danger in the fiscal cliff lies.

It is predicted that the cuts in government spending in particular would cause unemployment to increase. If that happens, consumer spending will decline because more consumers will be out of work, and those who remain in their jobs might be fearful of losing their jobs. If consumer demand falters, that will have two other multiplier effects. The first is that businesses will reduce their investment. Businesses typically invest when they feel that demand is rising.

Increased unemployment, combined with lower levels of government and business spending, will instead cause aggregate demand to fall. If business investment falls, that will have further impacts on unemployment. This will create a negative feedback loop -- a multiplier effect in the wrong direction for the U.S. economy. Additionally, when consumers and businesses are spending less, the government will receive fewer taxes.

That will cause government to spend less, one would like to think, again continuing the multiplier effect and driving GDP down so far that we enter a recession. The one interesting thing is that such a scenario would likely see imports decrease because fewer people and businesses are buying things. A strong enough recession could impact the price of crude oil, further lowering imports. Exports would likely increase, however, as American.