The US has a lot of debt. Not an unmanageable level at the moment, but enough that the current pace is unsustainable. The Republican party decided last summer that they would not raise the debt ceiling, which allows the US to take out more debt, unless the issue was addressed. After months of negotiations, the best that they could agree to was to cut $1 trillion dollars of cuts spread out over 10 years split evenly between defense and social programs starting on January 1, 2013. Unless a larger long-term deal is made, cuts to programs that both parties want will happen. This was supposed to be the stick that forced both sides to the table to negotiate.
A Super-Committee was created to negotiate a compromise. Unsurprisingly, they failed. It is the US Congress that we are taking about after all. The cumulative impact of the cuts combined with the expiration of the Bush tax cuts will send the US back into recession. Not a good thing to do when unemployment is already at 8.2%.
Since there is an election coming up, no one wants to negotiate a deal until after it is over for a few reasons.
- First of all, they don't want their base to think they look weak by compromising.
- Second of all, there is a game of chicken going on where both sides think that the voters will blame the other side for going over the fiscal cliff.
- Finally, both sides think they will be able to win this election cycle and therefore be able to negotiate a better deal afterwards.
The end effect is that the US is stuck in a holding pattern of fiscal uncertainty until next year. Nobody wants to hire until they know what their budget for next year is going to be. Longer this game of chicken, the unemployed and the economy will continue to lose.