How the Fiscal Cliff Is Still Hurting the Economy

Photo (cc) by Oneras

Remember the fiscal cliff? It’s the reason you couldn’t file taxes until the end of January, leading to a delay getting your refund.

And remember how Congress “solved” it by raising taxes, including the payroll taxes that have been shrinking your paycheck? Well, that was just a partial solution. Because Congress still hasn’t agreed on a permanent way to address ballooning deficits, automatic, across-the-board federal spending cuts are now looming.

The automatic cuts were designed to force Congress to act. They were set up two years ago – but never supposed to actually happen. Well, now they are, starting at the end of next week.

It’s called “sequestration,” and economists believe it’s going to cut our already slow economic recovery in half, from more than 3 percent growth to about 1.75 this year. From The New York Times

“There’s a better way to do this,” said Joel Prakken, chairman of Macroeconomic Advisers, a forecasting company based in St. Louis. Still, he and others emphasized that the impact would most likely not be nearly as bad as the cost of the tax increases and spending cuts that had been scheduled to take effect Jan. 1.

About $85 billion of the government’s budget will disappear, about half of this year and the rest coming out of future spending. The cuts are automatic and indiscriminate – they’ll hurt everything from federally funded daycare to jobs at the Department of Defense to preventive healthcare. Everybody who has already been asked to make do with less will have to make do with even less.

In theory, Congress still has a week to do something about it. Economists argue that a many of the cuts would hurt the economy less if they were made later, after the economy was on more solid ground. And a new deficit reduction plan has been proposed that compromises on a lot of the political disagreements. But the series of Congressional failures that led us to this point doesn’t inspire much hope of that passing, does it?

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