How the Fiscal Cliff Could Hurt America

US News

Republicans and Democrats continue to meet in Washington, D.C., in an effort to avoid the fiscal cliff. But the optimism once held by many for the two sides' ability to strike a deal has turned into worry. The New Year is approaching quickly, and no agreement appears to be in sight.

This kind of bickering in the face of economic disaster is nothing new. In the summer of 2011, lawmakers couldn't agree to until the last minute to raise the government's borrowing limit ceiling. The political gridlock caused Standard & Poor's to downgrade U.S. debt for the first time in history.

This time, the consequences would be more severe if the parties fail to reach an agreement. The Congressional Budget Office says going over the cliff--a series of tax increases and government spending cuts set to take effect in January--would send the U.S. economy back into recession. These spending cuts and tax increases would remove $600 billion from the U.S. economy. Moreover, a November report conducted by Fitch Ratings Agency estimated unemployment--currently hovering around 8 percent--would rise to 10 percent if the country goes over the fiscal cliff.

The impact of going over the cliff would be felt not only at a macro level, but by the average American through tax increases. According to the non-partisan Tax Policy Institute, the average tax increase would be $3,346. Americans would also see less money in their paychecks.

[Read: Fiscal-Cliff Fallout: How the AMT Would Hit Taxpayers.]

"I get annoyed when the folks in Washington talk about costing the average taxpayer a few hundred dollars per year," says Ted Bovard, a principal Fort Pitt Capital Group, a wealth management firm based in Pittsburgh. "If you're living on the edge, the loss of a couple of hundred bucks adds a lot of stress in the household."

There are other ways in which going over the fiscal cliff would negatively affect American consumers. These changes would transform how Americans live beyond their bottom line and how U.S. companies decide whether to grow or contract.

Companies are "looking for a game plan. Washington knows they have some control over whether businesses decide to spend by not setting the exact tone," Bovard says. "The rest of the country gets hurts from that. Companies are sitting on cash because they're waiting for decisions."

Unintended consequences. The fiscal cliff would hit certain areas of the country especially hard, and the national capital region might be hit the hardest.

Automatic spending cuts triggered by the cliff would immediately reduce defense spending by $55 billion in 2013. That means many Pentagon contractors, the majority of which are located inside the Beltway, would lose business and be forced to cut workers. An Aerospace industry report on the impact of the fiscal cliff estimated that 500,000 defense jobs would be lost if the spending cuts kick in.

Federal employees are also at risk of losing their jobs. According to a report from Representative Norm Dicks (D-Wash.), the ranking Democrat on the House Appropriations Committee, the Transportation Security Administration (TSA) would eliminate 7,240 jobs, Border Patrol would cut 6,800 workers, and the Department of Homeland Security would be forced to terminate 24,500 workers.

[Read: 3 Post-Election Tax Changes You Need to Know.]

Federal spending cuts would also affect other areas of the country dependent on government spending. Florida, home to many defense contractors' branch offices and manufacturing plants, would suffer the loss of 41,905 jobs, according to an analysis by the Aerospace Industries Association.

Transportation concerns. The fiscal cliff would hit transportation projects and agencies, broadly affecting how Americans move throughout the country and the world.

Jobs cuts at the TSA would mean fewer security guards and longer lines. The problems would continue at the gate, with the Federal Aviation Administration (FAA) forced to cut $1 billion from its budget--reducing the number of air traffic controllers, which would translate to more delays. The FAA would also have to delay implementation of NextGen, a new aircraft guidance system that would replace decades-old technology.

In addition, the fiscal cliff would cause reductions in the federal emergency fund used to rebuild roads damaged by Hurricane Sandy. Rail travel would also take a hit, as Amtrak is set to lose $131 million.

Innovation destroyed, with short-term pain for all. Shawn Ritenour, a professor of economics at Grove City College near Pittsburgh, says the fiscal cliff would also take money away from companies that drive innovation.

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"More resources are being left out of the hands of capitalists and entrepreneurs," Ritenour says, adding that short-term pain is likely for the U.S. economy--no matter the outcome of the fiscal-cliff negotiations.

Fort Pitt's Bovard says this pain would be more acceptable if Washington could come up with long-term plans to control federal spending, while providing a clear blueprint for national fiscal policies.

"When do we take our eyes off who's going to beat the other person and say, 'How do we fix this issue'?" Bovard says, referring to political squabbling. "If you can share the pain across the board, we can get things moving in the right direction a whole lot faster. At the same time, it pulls everyone together."



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