Cliffs, Abyss and Myopic Economy

I have always been fascinated by catchy phrases coined by the intellects and the media. And thus, its no surprise I discovered the word FISCAL CLIFF very intriguing. I would rather like to reveal that these are desperate times with socializing opportunities curtailed by extreme cold, so I have resorted to, what you may call intellectual enlightenment. As a part of this scheme I have started reading ET (The Economic Times) in hope that it might help me develop a financial outlook and satisfy my urges for statistical analysis which are terribly frequent these. So, ET, in recent past, was plagued by this phrase Fiscal Cliff, so it quite natural to develop certain amount curiosity about it for any person even if he is not as inquisitive as me. Moreover, the enigma of the phrase is overemphasized by the height of urgency exhibited by US Congress in attending to it. I admit I was mesmerized by Senate's dedication as they sacrificed their New Year Eve to come up with a solution, however, this short-lived illusion terminated as I soon realised the problem prevailed for 3 long years and was tackled few hours before the deadline which just dramatized the issue. Eventually, I drew the conclusion that US politicians are similar to Indians only that they address the matter somehow, in the end, which we Indians don't?

                                                                      

One of the several cartoons that recently flooded the social media

Here, I will present a very simple explanation on what this fiscal cliff was and why it needed to be tackled and what possible outcomes it could lead to. Formally stating,

Fiscal cliff is a conundrum encountered by US when there was a drastic decline in budget deficit or in other words tremendous increment in fiscal revenue.

Now, first of all let me tell you what fiscal is? Fiscal is anything pertaining to public money. So, you may guess fiscal deficit is loss of govt. money and fiscal revenue by similar understanding is a gain of money by govt. So, with this explanation you may get deluded that fiscal cliff is favourable phenomenon. Here I become more specific with the use of term fiscal; a fiscal transaction doesn't involve asset generation, movement or dissolution, so fiscal revenue is generally based on taxes and expenditure cuts. And problem with this is, expenditure cuts reduce the amount money govt. is sending in the economy, which in turn reduces the productivity at the same time increased taxes curtails purchasing power which in turn curbs the demand. With reduced demand and productivity, we have a reduced GDP (production). It was estimated that this fiscal cliff may lead to a decrement of 4% in US's GDP in a year only. If you are wondering what the outcomes of fall in GDP are, it is recession in economy and I believe recession has in recent past become a part of every other vernacular with most of us aware of its implications.

If you are wondering what led to such situation; the answer is simple. It is the myopic economic vision prevalent these days. The notion that we have prevailed somehow, we will prevail somehow will someday have ghastly consequences on global economy. The above scenario was an outcome of short-sighted policy where a close to debt ceiling economy tries to make up for its debt crisis by increasing its revenue at the cost of economy's progress. Even now the solution is naive as US govt. has increased the expenditure which implies, sometime in future, USA will again reach the debt ceiling. Thus, there is a pressing need for a long-lasting solution.

For India, it is a high time to draw lessons from other's failures and seek a sustainable solution for the eternal deficit problem which can aptly be termed as fiscal abyss (I so desperately want to be the one who has coined the term). This solution should be progressive from economic point of view and should address to the issues of all sections of society. And thus overtaxing the super-rich is not at all a solution we should adhere to?