How Will Obama Handle The Impending Fiscal Cliff Situation?

Now that the dust has settled on the Presidential election (I’m still smiling) things will slowly but surely get back to normal in Washington. Despite recent assurances from House Speaker John Boehner regarding ‘working together’ we can expect more Republican bickering and attempts to derail and stall anything and everything that might just be beneficial to America as a whole.

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Since the election there has been a lot of talk about the so-called ‘fiscal cliff’ – the raft of temporary tax cuts that are due to expire if no new deal is agreed before December 31st. Alongside the tax increases are major spending cuts to defense, education, and vital social services. A recent report from Tax Policy Center states that the average annual tax bill for individuals will increase by $3,500 – and that the ‘super rich’ would end up paying more than $120,500 annually.

While these figures may indeed be a little scary we do have to remember a couple of important things. The first is that we still have until December 31st for Congress to strike a deal, and secondly, much more importantly, will President Obama be interested in making a deal? It’s no secret that President Obama sees cutting military spending as a priority. If no deal is put in place by the end of the year military spending will be severely reduced – maybe this is President Obama’s plan?

Paul Krugman, writing in yesterday’s New York Times, gives the impression that President Obama may be inclined to simply let the tax cuts expire and ‘hang tough’. In his article titled ‘Let’s Not Make a Deal’ he states that “Mr. Obama should hang tough, declaring himself willing, if necessary, to hold his ground even at the cost of letting his opponents inflict damage on a still-shaky economy.”

Krugman goes on to add that “Why? Because Republicans are trying, for the third time since he took office, to use economic blackmail to achieve a goal they lack the votes to achieve through the normal legislative process. In particular, they want to extend the Bush tax cuts for the wealthy, even though the nation can’t afford to make those tax cuts permanent and the public believes that taxes on the rich should go up — and they’re threatening to block any deal on anything else unless they get their way. So they are, in effect, threatening to tank the economy unless their demands are met.

We still have just under 2 months for a deal to be worked out – whether it will happen remains to be seen. If Krugman’s argument is a little too ‘us and them’ for your liking Josh Bivens and Andrew Fieldhouse’s excellent Economic Policy Institute report titled ‘A Fiscal Obstacle Course, Not a Cliff’ offers a thorough and concise take on the issue.



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