Will we fall off the fiscal cliff?

Now that the election is over, Washington’s attention has turned to something called the fiscal cliff. N.C. State University economist Mike Walden describes what it is and why it matters.

“Well, there’s been a lot of discussion on this … . It’s really the result of a failure of the Congress and the president last year (2011) to reach a budget deal. So what they did is they said, ‘Look, we’re going to set up a trap in some sense. If we don’t reach a budget deal in another year, we’re going to … have a lot of bad things really happen quickly, and that’s going to give us motivation to really get to a deal.

“And so what these bad things will be if, at the end of 2012, a deal’s not reached is several taxes will go up, hitting virtually everyone in the country, as well as federal spending will go down.

“Now we can debate whether, long run, that’s what we want to have happen in the federal government — and some say that’s exactly what we want to have happen — but what concerns economists is the suddenness of this and the size of the changes will be all at once, and that’s the where the term cliff comes from.

“And many, many economic analysts shows that if we did see this happen — that is, the increase in tax rates combined with the cut federal spending — we would see the economy shrink at least for a quarter, at least for the first three months of 2013. Unemployment would go up. … More people would be put out of work. And of course no one wants that to happen.

“So, this is why many think that a compromise will eventually be reached. A deal will be reached, but obviously we’ll have to wait and see.”