Economic Theory for the Fiscal Cliff

I believe that the Fiscal Cliff deal was a horrible, but necessary, deal. It was unbalanced between tax increases and spending cuts, at a ratio of $41 in tax increases for every $1 in spending cuts (41:1). We needed to have more spending cuts involved, and hopefully Congress can engineer these cuts before the debt ceiling deadline in February.

While thinking about the Fiscal Cliff, I started thinking about economic theory. I may be completely wrong, and I have not taken an AP Economics course yet. But I have an idea, of which I would like to share with you. This idea demonstrates an option for resolving the Fiscal Cliff crisis, while watering down on the economic effects of the Fiscal Cliff.

The first step in this theory is to adjust the Fiscal Cliff timetable, of which you will understand my reasoning for later. Divide the amount of cuts and the amount of tax increases into two even halves. Set the first half of spending cuts and tax increases to set in a few days after Christmas, and set the second half to set in at the end of February. These times are the slowest parts of the year for businesses.

We would then proceed to go over the Fiscal Cliff. But in the week before we go over the cliff, we would need to suspend the printing of new currency, and have this carry on for an additional week, totaling two weeks. The government prints an average of $800 Million dollars a day, and if production was halted for a few weeks, we would see deflation hit.

Deflation is usually a bad thing, but in this instance, it would be a good. Deflation for a short period of time (These two weeks) would drastically drop the price of gasoline, household products, and essentially everything. My understanding of deflation is that it creates short-term economic prosperity, but when held out long term, it is disastrous. Deflation would allow a lot of extra cash to float around homes and businesses, as costs would drastically be cut. Paychecks would also be cut, but not nearly as much as costs would be.

This would allow for businesses to drastically grow in these weeks. They would hire, invest, and expand their businesses. This would in-turn build up the economy, and promote major economic growth. Soon after, currency printing would kick back up, and soon get to normal speed after a few days of slow currency introductions into the economy.

But what about the Fiscal Cliff? Didn’t we go over the cliff?

We did go over the Fiscal Cliff. But while going over it, we were also experiencing economic prosperity. The deflation was long enough that the economy expanded and grew, yet short enough that it did not have any long term effects on our economy. This essentially watered down the effects of the Fiscal Cliff’s spending cuts and tax increases, and allowed for an extremely diminished effect on the economy from the Fiscal Cliff.

We would then go through this process again in February, once the watering-down from the first deflation had worn off. This would, once again, recover and revive the economy during the crucial months of the Fiscal Cliff. Soon after, people would be paying their taxes, and then a few weeks later, receive tax refunds. We would work with the IRS as to increase the speed of these refunds, so that the refunds sustained the economy through the few months after the Fiscal Cliff.

By now, the economy has been sustained and revived almost 8 months after going over the Fiscal Cliff. The disastrous effects have been diverted. But wouldn’t this cause a bank-run, and we would experience the banking collapse of 2007 and 2008 all over again? Not if we drastically increase the reserve requirement for banks in those weeks of deflation, and then lower interest rates to encourage drastic economic expansion.

Come November, we’ve gone through most of the year, and the cuts and tax increases have been enacted. We’ve gone through major deficit reduction, but we are still experiencing the effects of the Fiscal Cliff. The holidays and Black Friday allow for more economic growth, as these are typically the busiest times of the year for businesses. Businesses make the majority of their sales now, and they also hire a very large amount of temporary and seasonal workers.

The government also owns a book value of nearly $12 Billion dollars in Gold Bullion, and it is assumed that the government also owns a similar amount in other precious metals. We could then work with foreign governments to exchange our metals for recovered US currency, and bring it back into America. We would engineer this program into January.

By buying back our currency, we are controlling inflation without having to experience the dangerous affects of deflation and hyperinflation. This would carry us into the next year, and the deficits would have been reduced so much that we would be on a sustaining path towards a surplus.

Then requiring that each state has a balanced budget amendment (Which we could do by simply withholding major state-wide block grants), we prevent the states from developing deficits, and they could each begin to pay back their own debts. This would allow for the states to essentially bailout the Federal Government once they have a surplus.

Obviously, there will be some flaws somewhere in my plan. I haven’t taken a college-level economics course yet, so I apologize if this fundamentally does not work. Please leave your thoughts, comments, ¬†and further information on the logistics of this plan! If my plan does not work, I want to know!

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  1. [...] without the economy being pressed. It does not have a political leaning. I want your feedback!…-fiscal-cliff/ Does my theory 'Work'? Reply With [...]

  2. I agree with your details , excellent post.

  3. Using the debt ceiling and the “fiscal cliff” as leverage to extract additional concessions from the other party may be clever hard-ball politics, but at what cost to the rest of us? In at the Worden Report, I argue that the high-stakes political poker game may reflect a weakness in democracy itself. In short, self-governance does not confront hard problems very well.

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