US Economy: Going over the fiscal cliff: Why not? US economy could benefit - by RM

Nobody likes to admit it, but going over the fiscal cliff would probably benefit the US economy in the long run.

The only reason why going over the fiscal cliff could cause some initial problems is that it would entail a large number of deficit reductions all happening up-front. If we look at Greece, Ireland, Portugal, Spain, and Italy as an example of this, we find that it causes a lot of financial pain to everyone, but that it eventually turns out to be manageable. Certainly manageable for a country like the US, which has far more resources than the European countries mentioned above.

Another positive side-effect for the US going over the fiscal cliff would be a guaranteed deficit reduction to 58% of GDP by 2022. The alternative, if current policies continue is that the US debt would climb to at least  90% of GDP within one to two years.

Going over the fiscal cliff will force the US to cut all kinds of excessive spending and loopholes,  including that for the defense industry and military, while tax increases would provide the US with additional revenues to accelerate paying off the deficit.

By going over the cliff the US would be able to achieve a deficit reduction of at least $1.2 trillion over two years. This would not only be a record for any country in the world, but it would also put a big smile on the faces of the World Bank and the IMF and without a doubt reestablish the US triple A rating in the financial world.

It's decision time for the US Congress and the White House. Should it go for the radical treatment by going over the fiscal  cliff and thereby removing the rapidly spreading "economic cancer", or keep pouring money into "stop-gap measures" which can only increase the deficit?

There are only about three weeks left for the US political establishment  to deal with this problem as the next major economic problem already looms ahead.  This one concerns the $16.4 trillion debt ceiling which is coming up for review in February 2013. Given the state of the US economy the debt ceiling will have to get raised in order for the US to pay for its obligations.

Overall a pretty grim picture, specially when one takes into consideration what is at stake. Inaction is certainly no solution.

EU-Digest