Fiscal Cliff

The fiscal cliff refers to two things happening at the end of 2012 that economists, analysts, and bystanders feared: the expiration of Bush-era tax cuts and across-the-board government spending cuts.

What do tax increases do? Leave people with less money in their pockets. If you ask a Keynesian economist, they’ll tell you tax increases are likely to put a damper on the economy, since people will have less to spend.

What about government spending cuts? That means less government investment in things like schools, roads, and infrastructure...well, in this case, everything funded by the federal government. It also means less help from the government for low-income earners, and less spending for the U.S. economy in general, which would theoretically slow it down.

With the end of the tax cuts and government spending cuts near, people worried about what would happen to the economy on December 31st, 2012: less spending, increased unemployment, and faltering consumer (and investor) confidence could send U.S. markets plummeting.

Well, we’re still here...so what happened? Congress actually got something done. On January 1st, 2013, Obama signed the American Tax Relief Act of 2012 into law, which kept taxes low for lower- and middle-income earners, a short-term balm for the economy's pangs. It also delayed the government spending cuts by a couple of months. And we survived the fiscal cliff. For now.