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.
Glossary
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.
Wow, what a scary thought, that a negative multiplier could affect America. We all have to be careful, may end up not being the greatest advice for this. The government has been trying to reduce spending and raise taxes so we know that this means there is some demand-pull inflation (obviously) but couldn’t that mean that as the citizens save their money as well that it could just get worse. We know that American citizens are terrified of going bankrupt and so they always think that if they save, save save, that it’ll be better off for them in the long run; but it could end up with the opposite effect. The entirety of the United States economy runs on how well money is circulating and if people are refusing to spend that would only lead to increasing inflation that digs us into a recession.
ReplyDeleteI think it is a great point that you mentioned the multiplier effect and how it could work in the opposite direction of having less spending and thus lowering the GDP by a great deal instead of the amount mentioned in the cuts. I also read an article from ny times showing that economists believe raising taxes produces less damage in the long term because the spending cuts reduce GDP much more, a quote related to this was "Professional forecasters estimate that a tax increase equivalent to 1 percent of the nation’s economic output usually reduces gross domestic product by about 1 percent after 18 months. A spending cut of that size, by contrast, reduces G.D.P. by about 1.5 percent — substantially more."
ReplyDeleteEven some look at government spending as the government just spending money recklessly, it really does stimulate the economy quite nicely and has more effect than people realize.
I find it pretty interesting that America fluctuates so quickly, and that how one year can be completely different/drastic from another. It’s good that your article related directly to what we’re learning in class right now with new terms (like the negative multiplier effect), as well. In a sense, although they’re most likely not, everything seems like it’s being “procrastinated” in recent times. With the temporary fiscal policy coming to a conclusion at the beginning of the year, it was only time that a new “solution” needs to be proposed. Perhaps a more long term goal should be projected.
ReplyDeleteNow that the automatic spending cuts have gone into effect due to lack of bipartisanship in congress it will be interesting to see how the economy will be effected. Some politicians after March 1st have been saying the effects wont be nearly as bad as they predicted. Let's all hope that they are right.
ReplyDelete-Maci Woods
Hannah, I really liked how you discussed and explained the fiscal cliff, at such an appropriate time! It was interesting to read your take on the whole situation. I feel like most high schoolers don’t care to know what’s happening around the world and in our US government, so this glooming fiscal cliff that hit us this week already, is not yet a problem to them. But, it’s good to see you help us and the rest of the Econ blog understand what’s going on, and I really enjoyed how you related it directly back to our text book with the multiplier (or negative) effect!
ReplyDelete