Along with the termination of the end-of-the-world controversy, the end of 2012 brought the Fiscal Cliff deal to a close as well. But among the ordinary, everyday people the Fiscal Cliff was nothing more than a good old trick of the media, nothing more than Santa Claus or that monster under our bed. The fiscal cliff, though the temporary crisis is over, represents one of the most essential and critical economic compromises of the American economy.

Fiscal Cliff:

Now as couch potatoes, we all have heard the term “the cliff” and such phrases in the fiscal cliff phenomenon, as “going over the cliff”. What does this all mean? The fiscal cliff was a media short hand term to explain the dilemma the United States government faced at the end of the year of 2012, when the Budget Control Act of 2011 was supposed to go into effect. This budget act included 2 major parts. The first part included budget cuts-major cuts. These budget cuts came as a result of the 2011 debt ceiling crisis, when the United States economy reached its “maximum” debt of 1 trillion. This budget cut would essentially chop down the defense budget and other essential budgets and parts of the existing American economy, such as medicare. Those who agreed with these budget cuts went into a few “automatic” cuts. These cuts were proposed to go deep into the American economy and raise us from international dependence to pay off these debts. Another part of the budget control act of 2011 included the tax increase. Taxes were proposed to end last year’s temporary payroll cuts, and dive into a resulting 20% increase on taxes for workers. Essentially the tax cuts for businesses would end, and the bush era tax cuts (2001-2003) would come slamming to a finish. Of the two, the taxes would have a larger effect on the American people, and strike more fear in the media than in the budget cuts, largely a “government issue.” Thus, the media imagined the cliff, using intense imagery of the economy jumping off a cliff, representing the severe budget cuts and tax increases that would help raise the economy from the ditch below the cliff.

The 2012 Fiscal Cliff Debate:

Dealing with the fiscal cliff, the lawmakers on capitol hill faced a choice of one out of the three options, none of which were great for the betterment of the American Economy. They included the 3 following situations:

1. The lawmakers would allow the Budget Control Act of 2011 to go into effect, and do nothing to change the course of action of the act.
2. The lawmakers would still allow the Budget Control Act to go into effect, but they would cancel some of the scheduled tax increases and budget cuts. This modification would prevent the United States economy from being submerged in a crisis. However, these modifications would further increase the deficit.
3. The lawmakers could approach the Budget Control Act of 2011 with a middle course. This approach would address the budget issues with limitation, but would have some-what of a modest impact on the growth of the economy.

The lawmakers essentially chose the lesser of the 3 evils, #3 on the list. This would soon stir a heated debate in congress, primarily due to how congress decided to put off the decisions on this case until the eleventh hour, since the deficit and jobless faced a danger most perilous as compared to this budget act as it approached its deadline.

In the end, the lawmakers had to choose from a compromise they were willing to put on the table for selection. Generally, the republicans stuck to their party-lines and kept with their original plans of cutting the budget and avoiding raising taxes. This was a surprising move in late 2012, since the budget cut would include military spending cut, a highly advocated resources to the recent republicans like George H. Bush and George W. Bush during their presidencies. The democrats, on the other hand, were willing to sacrifice a little from both sides. The democrats voiced their opinion to cut some of the budget as well as to raise some taxes. The most debated topics put on the table included the tax raise for 450,000 income couples (35% tax to 39.6% tax), as well as the decision to allow the 2% payroll tax cut expire and delay the devastating spending cuts for another 2 months. These plans all seemed feasible, but there was still the possibility of that case that no one would look at, the worse case scenario.

The Worst-Case Scenario:

If the fiscal cliff savior plan was not stopped, the economy would have been in serious trouble. Some parts to this worst case scenario can’t even be put into understandable numbers. The effect on the American economy would be devastating. The raised taxes and budget cuts would reduce the deficit by $ 560 billion, but it would reduce the GDPC (Gross Domestic Product) by nearly 4 percentage in 2013, which would no-doubt send the economy into a large recession, and result in negative growth in the American economy, causing the $560 billion recession to have absolutely no effect at all. Simultaneously, the predicted unemployment rate would most likely increase by 1 percent. Although that may sound quite low, 1% in the unemployment rate would result in a loss of two million jobs. According to the wall St. Journal on May 16, 2012, the estimated impact was interpreted in the following  terms: $280 billion would be pulled out of the economy, $125 billion from the expiration of the payroll-tax, etc. the list goes on. However, luckily, that was not the plan that went into effect.

The Fiscal Cliff Deal:

The final deal was proposed 3 hours before the midnight deadline on January 1^st, 2013. Less than a day later, both the senate and the House of Representative approved the deal, putting the Fiscal Cliff Deal into effect and essentially saving the country from the economic downturn. The final deal that was struck included an increase of the payroll tax to 6.2%, reversals of Bush era tax cuts, an increase of tax on investment from 15% to 23.8% for filters in the top percentage, among others. However, luckily due to the compromise, essential tax cuts still remain in place.

On the flip side, however, remains the consequences of such a deal. This fiscal deal could increase the deficit by as much as $ 3.9 trillion, as well as have a seven-tenths of a percent impact on the GDP growth (negative impact).