The real cost of the ‘fiscal cliff’

December 14, 2012 11:00 AM

Ryan Rivet
rrivet@tulane.edu

As Republicans and Democrats continue negotiations, America hurtles toward the “fiscal cliff” deadline of Dec. 31, when mandatory cuts will be made to government spending. Recently, New Wave sat down with Michael Bernstein, Tulane University provost and an economic historian, to learn his thoughts about the fiscal cliff. 

Michael Bernstein

“Government spending, contrary to all the political rhetoric, has real economic impact,” says Michael Bernstein, provost and an economic historian. (Photo by Paula Burch-Celentano)


What would going off the fiscal cliff mean for the average American?

Government spending, contrary to all the political rhetoric, has real economic impact. For every dollar the government spends on projects, that money translates into a lot of jobs. When you start to cut back those expenditures, or even slow down the rate of growth, you’re pulling dollars out of the economy.

If we end up with no agreement, cuts will come and then they will have to scramble months down the road to try and repair the damage.

Would it be possible to unring that bell?

Yes, it’s possible, but people will get hurt in the process. As a matter of economics, it can certainly be undone, but there is real damage on the way and real human costs. For some people one week, one month, without work can be a disaster. That’s where the delays in Washington have their most poignant impacts.

Do you think failure to reach an agreement will put the economy back in a recession?

I do. GDP — Gross Domestic Product — is the sum of four major components: consumer spending, investment spending, government spending and the net trade balance. Of those four variables, the biggest one by far is consumer spending.

If we go over the fiscal cliff, there will be a reduction in government spending, which has a negative impact on jobs. As a result, consumer spending will plummet. As consumer spending plummets, investors and companies will begin to cut back in order to protect themselves. The cycle gets worse and worse.

That’s the irony of the economy — as things start to go sour, our instinct is to do precisely the thing that will make it worse. Cutting back just makes it spiral further downward. That’s what I worry about when I look at the oncoming fiscal cliff.




 

Citation information:

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