Kate Higginson- U.S. Fiscal Cliff Could Lead Global Recession, OECD Says

             The article reviewed the OECD’s predictions of what will happen in 2013 when the US goes over the “fiscal cliff”.  The article discusses many of the same things we have reviewed over the past semester.  Recently we discussed the fiscal cliff, meaning the end of the Bush tax cuts, and what we thought would be a good plan of action, whether to go off the “fiscal cliff” or to continue to patch up the problems.  If we do go off the cliff, as the OECD predicts we will, the shock of the fiscal cliff could put the US into a recession again.  After reading the article I think it is best if we do go off the cliff even if the repercussions are harsh.  Obama needs to negotiate with the Republicans and reach a budget agreement, we need to increase taxes, cut spending, and have a higher debt ceiling.  All of these options we discussed in our class.  The federal deficit is currently huge, meaning our government’s expenditures exceed the government’s revenues.  In 2013 according to the OECD there will be 607 billion dollars in federal spending cuts and tax increases.  This will effect consumer confidence, which we recently discussed meaning the consumer no longer feels optimistic about our country’s current economic state and their own financial stability.  The consumer confidence will diminish rightfully so because without extreme measures made in the new fiscal year the federal deficit will come to 1.04 trillion dollars in debt.  In class we mainly focused on the US economy and what will happen here if we go over the fiscal cliff.  But if our economy declines, the current European Crisis will be greatly affected also.  Possibly causing us to enter a global economic recession. 

            The article also talks about what actions the Federal Reserve will take if we go over this “fiscal cliff”.  In class we discussed in great detail what the job of the Federal Reserve is.  It is their responsibility to ensure there is enough money and credit available to sustain economic growth without inflation and they can affect this because they are in control of the money supply.  In my opinion if we are to go over the fiscal cliff the Fed will have to buy more bonds and securities to ease the financial conditions of out county.  In the article OECD predicts that the unemployment rate will decline to 7.5% by the end of 2014.  This has been a very slow recovery for the labor force as we discussed in class yesterday.  The unemployment rate is a lagging economic indicator meaning there is a lot of uncertainty with the economy so actions that affect the unemployment rate aren’t taken until after employers are sure the economy is stable or unstable.  Because the unemployment rate is countercyclical, meaning it moves in the opposite direction of GDP the OECD predicts the US’s GDP to grow by 2.2% this year.  The article discussed a lot of information that we covered in class and it is going to be interesting to see what happens when we finally do go over this “fiscal cliff” that everyone is anticipating.  

Source: http://www.bloomberg.com/news/2012-11-27/u-s-fiscal-cliff-could-lead-global-recession-oecd-says.html