Could 'fiscal cliff' push US into recession? Four questions answered

The nonpartisan Congressional Budget Office (CBO) warned in a report Tuesday that if Congress does not deal with a raft of fiscal measures by Dec. 31, the US could enter another recession. So what is this fiscal cliff and what is Congress doing about it? 

3. Why not push the whole thing off a year?

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    Tea party protesters have helped made the debt a top priority in Washington.
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The CBO points out that the reason we’re having this debate is because of America’s long-term debt problems.

At present, the America’s debt held by the public stands at 73 percent of its GDP. Under a middle-of-the-road scenario constructed by the CBO – which allows some tax cuts or spending increases to continue while disallowing others – debt would rise to 93 percent of GDP by 2022. 

Without changes, “debt would be substantially higher,” the CBO wrote. “However, debt cannot continually increase as a share of the economy: Policy changes would be required at some point. The longer the necessary adjustments in policies were delayed, and the more that debt increased, the greater would be the negative consequences.”
 What would the negative consequences be?

  • Less flexibility in times of crisis. Higher debt limits decrease the government’s ability to alter its spending course during moments of national stress. If you get into a car wreck and don’t have enough savings, you can put the repairs on your credit card and pay it back over time. If you’ve already maxed your credit card, however, your busted chariot may have to go without. The problem is that when disaster hits the US government it’s usually in the form of a financial panic, a terror attack, or a war. Doing nothing is not politically feasible.
  • More taxpayer money going to interest. Increasing debt levels mean that interest payments on the debt chew up a higher and higher share of government revenues. Every dollar to an interest payment is one dollar that isn’t building a bridge, paying a soldier or helping the US invest in innovation and education. In other words, high debt levels make the government less and less effective – and America less prosperous – over time.
  • Risk of investors upping interest rates. Higher debt makes government finances more unstable. If government finances deteriorate further due to another recession, investors could get spooked and drive up interest rates on US government debt. When that happens, the government may not be able to borrow at rates it can afford and instead would have to institute spending cuts that are sudden and drastic – as House Budget Committee Chairman Paul Ryan says, that would be a “bitter austerity” along the lines currently confronting several debt-strapped European nations.
  • Undercutting confidence. Lastly, letting the debt debate linger undercuts American business confidence as well as confidence in the nation’s political institutions. Were America to solve its debt problem, this argument goes, entrepreneurs and business owners would have the certainty they need to forge ahead and help grow the economy. "You can't cut and tax your way alone out of this challenge around the debt if you don't have the third leg of the stool, which is growing the economy," said Sen. Mark Warner (D) of Virginia.
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