Consequences of inaction: The fiscal cliff and the looming entitlement crisis

Reuters

U.S. House Speaker John Boehner (R-OH) points to a chart while speaking to reporters in the Capitol in Washington December 13, 2012.

Article Highlights

  • The consensus among economists is that if the fiscal cliff isn’t preempted, the US economy will fall into recession.

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  • As large and consequential as the pending fiscal threat may be, it isn’t the last fiscal cliff the US economy will face.

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  • The impending insolvency of Medicare and Social Security would cause painful fiscal contractions if not averted.

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The United States is just weeks away from a $7 trillion fiscal cliff, when, among other changes, marginal tax rates are scheduled to rise to levels not seen in more than a decade and $1.2 trillion in automatic spending cuts (known as sequestration) are scheduled to take effect. The consensus among economists is that if this fiscal cliff is not preempted, the American economy will fall into recession.

As large and consequential as the pending fiscal threat may be, it is not the last fiscal cliff our economy will face (and neither is it the first we have confronted). The impending insolvency of Medicare and Social Security, equally certain as the near-term fiscal cliff without congressional intervention, would also cause painful fiscal contractions if not averted.

Policymakers and policy analysts are well aware of both the near- and long-term fiscal threats posed by inaction. The consequences of failing to solve these problems, however, are less appreciated. Each problem has a unique makeup and poses specific challenges to policymakers. This paper explores the implications of the seemingly unimaginable actually occurring, first looking at the consequences of the near-term fiscal cliff and then focusing on the Social Security and Medicare entitlement crisis down the road. 

To read the full report visit the National Chamber Foundation website.

Alex Brill is a research fellow at AEI and a National Chamber Foundation fellow. He previously served as policy director and chief economist to the House Ways and Means Committee. 

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