By now, most everyone's heard about the fiscal cliff, and along with it all the ballyhoo on both sides of the aisle about spending cuts, job creators, the deficit and so on. What's it all mean?
To start off, a bit of background: When an administration needs to spend some money - on the infrastructure or social programs, for example - the money they use comes from either taxes or loans from the Department of the Treasury. In order to make sure the Treasury doesn't borrow too much money, Congress enacted a limit to how much the Treasury can borrow - the debt ceiling. Every time an administration comes close to hitting it, Congress simply votes to raise it. This has happened 68 times since 1960. In 2011, we came very close to that ceiling again. If the United States were to hit this ceiling, the consequences would be disastrous - a partial shutdown of the government, missed Social Security and Medicare payments and an increase in the interest rate, making it even harder for the United States to borrow money.
Raising the debt ceiling requires approval from both houses of Congress. In 2011, the House of Representatives was controlled by the Republican Party, while the Senate was controlled by the Democrats. Though both parties understood the need to raise the ceiling, each had different ideas as to how to do it. The Republicans favored a "dollar-for-dollar" deal which would raise the ceiling to match spending, a "Balanced Budget Amendment" stating the country couldn't spend more than its income and budget cuts. The Democrats favored increased taxes for certain groups of taxpayers, and opposed any cuts to Social Security and Medicare.
Eventually, a compromise was reached, and the Budget Control Act of 2011 was signed into law. The act raised the debt ceiling by $400 billion, from $14.3 trillion to $14.7 trillion and authorized $917 billion in cuts over 10 years. Congress also created a bipartisan "super committee" whose job was to find ways to reduce the deficit.
In order to make sure Republicans and Democrats would get along and play nice, the act set a deadline of January 1 to come up with a way to control the deficit. If the House and the Senate couldn't come up with a way to control the deficit, there would be mandatory cuts to the defense budget and to discretionary spending, not to mention a reversion to pre-Bush tax rates. Additionally, the Jan. 1 deadline coincided with a number of big spending cuts and tax increases. All this would've plunged the nation into a new recession. This is where the term "fiscal cliff" enters the national vocabulary, coined by Federal Reserve Chairman Ben Bernanke.
For months, neither side was able to compromise. The Republicans wanted no part of any tax increase, instead favoring deep cuts to entitlement programs such as Medicare and Social Security. The Democrats opposed spending cuts, instead favoring raising income taxes on the top two percent of earners.
On January 1, Congress passed the American Taxpayer Relief Act of 2012. The ATR permanently extended middle class tax cuts while raising income taxes on the wealthy, and extended some tax credits - such as those for college students - for five years. It also postponed expenditure cuts for two months.
The administration claimed the ATR as a victory for the working class.
"At this make or break moment for the middle class, the President achieved a bipartisan solution that keeps income taxes low for the middle class and grows the economy," according to a statement released by the White House Press Secretary. "For the first time in 20 years, Congress will have acted on a bipartisan basis to vote for significant new revenue. This means millionaires and billionaires will pay their fair share to reduce the deficit through a combination of permanent tax rate increases and reduced tax benefits. And this agreement ensures that we can continue to make investments in education, clean energy and manufacturing that create jobs and strengthen the middle class."
So that's that. Crisis averted, right?
Not so, said William T. Smith, chairman of the University of Memphis' Department of Economics.
"We have temporarily averted a crisis, but the solution is inadequate for several reasons," Smith said. "First, we have passed up a golden opportunity to arrive at a 'grand bargain' that would have reduced expenditures, raised taxes and simplified our tax code along the lines suggested by the bipartisan Simpson-Bowles Commission. Second, the solution is only temporary. The expenditure cuts have only been postponed, and we will see the same fights again in two months time. Furthermore, there has been no agreement to either lift or eliminate the debt ceiling. This means that by March we may hit the ceiling again, and the Treasury may be unable to issue debt to pay for expenditures to which Congress has already committed."
So what does this mean for students, especially for those graduating into a tough economy?
"First, the ATR is still mildly contractionary, so the economy may be growing a bit more slowly," Smith said. "Employment has been slow to recover. To the extent that this impacts the State budget, there might be more cutbacks to the University, but probably not this year. Second, some tax credits for college students have been extended. Third, the social security payroll tax is going back up by 2 percent, so we'll all be paying a couple of thousand more dollars there."
William Eyerly, president of the College Republicans at the U of M, believes that this is only the start of our economic troubles.
"The issue of raising the debt ceiling is next, and we're damned if we do and damned if we don't," Eyerly said. "If we raise it, inflation will increase in the U.S. If we don't raise it, we would have to implement massive cuts to pay back our debt, or we go into default and the U.S. dollar's value will decrease on the world scale. If we implement massive cuts, Government subsidies will go away and lower income families would suffer."
Eyerly predicts that Americans are in for more trouble down the road.
"I predict more hardship for the American people in the next year," he said. "People, especially students, will feel the effects of the economy by April. I predict tax returns to be disappointing to most, and it isn't going to get any better. Americans made their choice in November. So, because 51 percent of America feels that we should climb deeper into debt, the other 49 percent has to suffer."
The long term effects of the ATR and the fiscal cliff are still up in the air, but one thing is clear - this isn't something that will be resolved in two months. n
