US

WHAT'S THE "FISCAL CLIFF"?

David Wessel from the Wall Street Journal made an insightful video explaining what makes up the federal government's budget and what could happen if leaders don't reach an agreement and we go over the "Fiscal Cliff".

Click here to watch the video. Don't have time to watch?

Here are the cliff notes: What would going over the fiscal cliff mean?

Taxes would go up, broad swath of domestic & defense spending, huge blow to fragile economy. Forecasters say it would cause a renewed recession.

5 FACTS ABOUT THE FEDERAL GOVERNMENT

1) SPENDING: 2011 - 63% of federal spending was on auto pilot. Social Security benefits, Medicare, Medicaid, farm subsidies, interest on federal debt. Congress spent the rest of the year fighting about the other 27%.

2) HEALTHCARE: 1 out of every 4 $'s goes towards health care. In 1960 it was 10%. That was before Medicare and Medicaid. On the road (over next decade) to be 33%

3) GOVERNMENT EMPLOYEES: People think what the federal government does is employ a lot of people. Fed government employs 4 million people. But if you fire them all - you save 435 billion dollars That wouldn't reduce the deficit by even 1/3. So closing government agencies won't sold the problem.

4) DEFENSE: We spend a lot of $ on defense. We spent $700 billion on defense in 2011. That's 1 out of every $5 the government spent. We spend more on defense than these 17 countries combined: China, Great Britain, Russia, France, Japan, Italy, Saudi Arabia, India, Germany, Turkey, Brazil, Canada, Spain, Israel, S Korea, UAE, Australia

5) FEDERAL INCOME TAXES - Federal income tax that the average American pays has been falling for the past 30 years.

According to CBO - in 1981 middle income paid 19.2%, in 2007 middle income paid 14.3%How has the government been able to spend more? Rich paid more in taxes & we borrowed....36 cents for every dollar we spend. Much of it from abroad.

HOW WILL THIS ALL PLAY OUT?

David Wessel talked to 4 experts:

1) Grover Norquist, President, Americans for Tax Reform

2) Alice Rivlin, Senior Fellow Brookings Institution / Fmr. Clinton White House Budget Officer

3) Kevin Hassett, Senior Fellow AEI / Romney Advisor

4) Steve Rattner, Fmr. Obama White House Aide

Possible outcomes:

Congress could call the whole thing off. Could delay fiscal cliff. Conservatives know math doesn't work with out more new revenues. Tax increases won't solve the problem. Both sides need to meet past the goal line.

Go over the cliff. Going over the cliff could mean big tax cuts and big government spending. Could put us in recession.

If we tumble over - we could claw way back up. But - it would be demonstration to world that the U.S. was not handling fiscal affairs and no hand on the tiller.

HOW DOES THIS ALL END?

Could take a crisis...stock market crash...or artificial crisis...like the fiscal cliff. Or it could take out break of leadership.

David Wessel says, he's not sure which is least likely.