Just what is the ‘fiscal cliff’?


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November 27, 2012

You may have heard people talk about the “fiscal cliff” lately and not known what they were talking about. It’s okay — it confuses a lot of grown-ups, too! So KidsPost asked Neil Irwin , who writes about the economy for The Post, to explain the basics. After reading this, you can explain it to your parents.

First things first: What does “fiscal” mean?

The government spends money — to pay for the military, for example, and for health care for older people. It uses money from taxes to pay for those things. Tax money comes from, among other places, grown-ups’ paychecks. The decisions about government taxes and spending are known as fiscal policy.

Okay, so what is the “fiscal cliff,” then?

Hold on a minute! First you have to understand what the deficit is.

All right, then, what is the deficit?

The government frequently spends more money than it raises in taxes. The difference between the two is known as the deficit. It would be like receiving a $20 allowance but buying $25 worth of toys, books and candy.

How can the government do that?

The government is able to have a deficit by borrowing money. In the allowance example, it would be like someone buying $25 worth of toys by using his $20 allowance and borrowing $5 from a neighbor, promising to pay it back later. You can see the problem, though: Eventually the neighbor wants to be paid back! So it is better not to have large deficits forever, because eventually you could land in real trouble.

Right now, the U.S. government is borrowing A LOT of money: $1.1 trillion last year! (Can you figure out how many zeros that number has?) That number is so big it’s hard to even imagine, but it adds up to about $3,500 for every man, woman and child in America — including you!

So is the United States in real trouble? Is THAT the fiscal cliff?

Not exactly. The people who lend our government money are still happy to do so. (One reason for that is we pay them not only what we borrowed but also a little extra. That extra is called “interest,” and it’s why people are willing to lend money. So in our allowance example, you might borrow $5 from your neighbor but promise to pay back $6. That would be the original $5 plus $1 in interest.) But political leaders worry that might change someday, and they want to keep it from happening. In other words, we don’t want to wait for our neighbor to stop lending us money before we get the government’s spending in line with taxes.

But Republicans and Democrats can’t agree about how to bring down the deficit. Republicans, in general, want to solve the problem by cutting spending. Democrats want to solve the problem in part by raising taxes.

So where’s this cliff?

There isn’t an actual cliff. But through a series of decisions in the past, Republicans and Democrats decided to put in place a bunch of policies they really, really don’t like, all set to take place at the same time, so that they would essentially force themselves to work together to come up with a better plan. That time is now. Or, more precisely, January 1 — about a month away.

That sounds crazy!

Yes, it does.

So what happens if they don’t come up with a better plan?

This is where the cliff comes in. If there isn’t a new policy agreed to by January 1, taxes will go up on almost everyone. Spending will be cut on a lot of things the government does. If these things happen, they will probably hurt the economy. It could be so bad that it would feel like falling off a cliff.

Why would our politicians risk putting us in such a mess?

Because sometimes it takes the threat of something really bad happening to force grown-ups to do the right thing.

So are we going to fall off the fiscal cliff?

Republicans say they don’t want to go off the cliff. Democrats say they don’t want to go off the cliff. President Obama says he doesn’t want to go off the cliff. The question is whether they will agree to things they normally would hate, such as tax increases and cuts in spending for health care and services for older people in order to get there.

Can they find a compromise they all can be okay with? The answer to that is: Nobody knows for sure.

Yikes.

Yeah. Yikes.

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