To understand what the 'cliff' is and why everyone is worried and talking (not actually doing anything) about it, you have to go back to the Bush tax cuts of 2001 and 2003.
In 2001, President George W. Bush pushed for - and Congress passed - tax cuts for all income brackets. The Democrats demonized the package claiming it was 'for the rich' and the media happily went along with the spin.
In 2003, there was some follow-up legislation and, again, the left howled about 'tax cuts for the rich.'
Unlike other programs and laws which go on and on forever (whether they should or not), these measures had a sunset clause. They were all set to expire in 10 years. So, unless Congress acted, as of January 1, 2011, taxes for everyone in all income brackets, as well as taxes on capital gains, dividends and estates, were going to rise - or, more specifically, go back to the higher rates under Pres. Bill Clinton.
So in 2010, realizing that they weren't tax cuts just for the rich like they'd told everyone originally, Congress extended the cuts for two years - until January 1, 2013, which is just 14 days away.
If it were just the Bush tax cuts, they might manage to work out a deal to extend them again, even with Democrats and Pres. Barack Obama demanding that millionaires and billionaires pay more. Oh yeah - those millionaires and billionaires are people (and many small business owners who file as individuals) making $250,000 a year - not $1,000,000.
But there's more.
In 2011, the United States was about to reach it's debt limit. For those of you who are unsure, that's like the maximum amount on your credit card. You can spend up to that amount, but they don't let you go over it. In the case of the U.S. government, that's the amount of money the nation has the authority to borrow. We borrowed to the max and, unless we raised the limit so we could borrow more, we wouldn't be able to pay the bills (like to social security recipients, medicare providers, contractors and employees).
This is different than the yearly deficit which is the amount of money government spends every year that is greater than the amount of money it takes in. Spending more than you take in results in a deficit that must be covered, so the U.S. government borrows money to pay the bills. The cumulative amount of money borrowed over the years to cover the individual yearly deficits gives us the debt, which was $14.294 trillion in 2011. We hit that mark on May 16 of that year.
Clearly, cutting spending wasn't an option for Washington so Republicans and Democrats struck a deal. We'll raise the debt ceiling now and form a committee to identify what cuts should be imposed, they told the American people. The normal process in which congressional committees make such decisions was bypassed in favor a "super committee" consisting of 12 individuals and named the Joint Select Committee on Deficit Reduction.
They were supposed to reduce the deficit by $1.2 - $1.5 trillion over the next 10 years.
What made us think that this committee was going to be different than the regular congressional committees? Congress included the policy of sequestration - automatic cuts that would kick in if other cuts were not identified and passed.
As Idea Money Watch explains, the 'super committee' was no different than the other congressional committees and they failed:
Announcing its inability to reach an agreement on November 21, 2011, the members of the bipartisan committee stated that "after months of hard work and intense deliberations, we have come to the conclusion today that it will not be possible to make any bipartisan agreement available to the public before the committee's deadline."
So, as established in the BCA, sequestration was triggered when the super committee failed to reach an agreement. Sequestration generates automatic cuts for each of nine years, FY 13-21, totaling $1.2 trillion. Without Congressional action to prevent sequestration, the first round of cuts will take place Jan. 2, 2013.
The 2013 cuts apply to “discretionary” spending and are divided between reductions to defense ($500 billion) and non-defense ($700 billion).
So, taxes are scheduled to go up and spending is scheduled to be cut as of the first of the year.
That's the cliff - a double whammy on you and me and everyone else in the nation.
But that's not all....
Our current debt limit is a whopping $16.394 trillion - and, as of Tuesday, we were just $63 billion short of reaching it. Since the government spends about $10.5 billion a day, we'll reach the debt limit Dec. 23. Merry Christmas!
Of course, there are things the government can do to postpone actually hitting that limit, but Pres. Obama doesn't want to deal with those. He'd rather bypass Congress and have the ability to raise the limit all by himself.
This new power is part of the “deal” the President offered to House Republicans on the fiscal cliff. His “deal” is massive tax hikes, more government spending, and the ability for him to send that government spending skyrocketing through the stratosphere without any vote of Congress. One White House official describes this proposal as “resolv[ing] the debt limit without drama.”
See? It's easy - raise taxes on the 'rich,' spend even more money, and let Obama borrow whatever he wants without limit or check&balance by Congress.
Now Republicans - well, House Speaker John Boehner, specifically - are talking about pushing off the debt ceiling debate for another year, so long as they get spending cuts greater than the debt increase.
But remember - the spending cuts from the last increase are the ones they're trying to avoid taking now!
The American people were promised cuts in spending at least equal to the amount of additional borrowing granted in 2011. Those cuts are supposed to happen, but politicians in DC are trying to stop them.
It has been reported that one of President Ronald Reagan's biggest regrets was agreeing to small tax increases 'now' for cuts in spending over time. The cuts in spending never came.
The same holds true today. Just last year Congress and Pres. Obama agreed to spending cuts in exchange for being able to borrow more money. Now they're talking about borrowing even more money and raising taxes in order to avoid those 'future cuts' from 2011.
It never ends.
Terry Jeffrey puts numbers to the madness, proving that government doesn't have a revenue problem, since revenue has actually increased - they just spend a lot more (and that 'more' amount continues to grow) than they collect.
According to Obama's OMB, federal revenues will be $2.57 trillion this year. In nominal terms that is about $1.58 trillion more than the $991.1 billion in federal revenue for 1989. Even adjusted for inflation, it is $830 billion more.
But, again, federal spending has grown faster. According to Obama's OMB, the federal government will spend $3.83 trillion this year, running a deficit of $1.27 trillion.
Adjusted for inflation, the $152.6 billion deficit of 1989 equals $268.4 billion in current dollars. That means the $1.27 trillion deficit Obama plans to run this year is almost five times larger in real terms than the deficit Reagan ran the year he left office naming the deficit as the only regret in his farewell address.
When Reagan left office in 1989, federal spending was 21.2 percent of gross domestic product. This year, the Obama administration plans to spend 25.1 percent of GDP.
The spending is growing faster than the revenue, which means even more borrowing to cover the expanding gap. Yes, this qualifies as 'stuck-on-stupid.'
And Boehner seems poised to agree to this instead of holding the line, not just for the conservatives who helped elect him, but for our nation and our children.
The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies.
Leadership means that “the buck stops here.” Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better. I therefore intend to oppose the effort to increase America’s debt limit.
That was Barack Obama in 2006 when he was a senator from Illinois and Bush was president.
Obama was correct then, but he - and just about everyone else in Congress - have succumbed to the spending addiction that hits individuals once they get to the logic-free zone of Washington, D.C.
Now we - and our children and grandchildren - are going to suffer, one way or the other, because those people we elect to represent us just can't make the hard decisions necessary to return fiscal sanity to the government. They keep kicking the can down the road, think the road will go on forever.
It doesn't - and that's where we are today.
For another perspective on this, be sure to check out this post by Tom Blumer at Bizzy Blog.