Wednesday, November 14, 2012

Fiscal Cliff

Obama fired the opening shot of the battle of the fiscal cliff by calling for more revenue increases than were included in the failed summer compromise. Perhaps the best spin on this strident approach is that Obama is giving the Reupublicans a way to save face and accept the summer compromise.

If Democrats and Republicans cannot reach agreement by January 1rst or shortly thereafter,  GDP will be 5% lower than it otherwise would have been over the next 12 months. Considering that the U.S. only grew by 2% last year, this implies a significant recession.

Even if a plan is passed in the next month that bridges the fiscal cliff, the long term budget problem will not be solved.  To get a feel for the challenge try this budget game:
NY Times (11-13-2010) Budget Puzzle: You Fix the Budget

 Two favorite recent articles:
1. Philadelphia Inquirer (11-11-2012) "Fiscal cliff' poses risks of another recession by Joel L. Naroff
2. The Economist (11-10-2012) The budget deficit; To the cliff, and beyond; Barack Obama and the Republicans have precious little time to act

For my students:
1. Complete the NY Times game and discuss your solution.
2. As the situation evolves daily, discuss your ideal solution and your expectations of the actual outcome of the battle of the fiscal cliff.

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