U.S. Fiscal Cliff: What it Means For Millennials, and What You Can Do to Prepare


Don't fall off the cliff. Everyone is worried about the "fiscal cliff." Even Congress is talking about it, so it must be a big deal, no?

From the grandstanding and the wild gesticulating going on in the Capitol, Congress seems to be at least trying to do something. Like always, they'll likely come up with a last-second bill that kicks the can a little further down the road, and will allow them to pretend like they accomplished something.

So, let's see what this "cliff" is, and what it means for millennials, and the rest of the country.

Why the Cliffhanger?

In November of 2011, the nation waited with bated breath as Congress fought toward a deal that would raise the debt ceiling. Like he usually does, Speaker of the House John Boehner caved to Democrat pressure, and signed off on a deal that raised the debt ceiling, though the caveat was that at the end of 2012, massive automatic "spending cuts" would kick in and taxes would go up, as an incentive to force Congress to actually do something for once.

Like Congress usually does, they failed to get anything done in time. So now, the nation is threatened with a "fiscal cliff," or series of tax increases and "spending cuts" that will be political suicide, no matter which way things go. So, now the Republican-led House and the Democrat-controlled Senate are at loggerheads with each other and with the president to come up with a plan to cut a huge amount of spending and decrease the deficit.

Of course, what Congress calls "spending cuts" aren't what normal people call "spending cuts." In fact, they're quite different. When Congress claims that they are cutting spending, what they actually mean is that spending will increase less than it was going to. Of course, to anyone who actually has to work for the money they spend, that concept is beyond preposterous, but Congress gets to spend YOUR money, so what do they care?

Tax Cuts

On January 1, the "Bush Tax Cuts" will end, which will increase the amount of withholdings for most Americans (the ones that are working, that is), and it will end the Earned Income Tax Credit that helps lower-income families (even I qualify) recoup much of what they paid in withholdings throughout the year. All told, the tax increases will disproportionately affect the "wealthier" Americans, or those who file on earnings of more than $250,000 a year, but the problematic thing is that many of these folks are small business owners who declare business revenue as income. This will likely cause a reduction in new employees, as many of those affected the most will be the small business owners who already run very small margins.

So, millennials as a whole may not feel an immediate squeeze, assuming that nothing is accomplished by Congress. Your pay checks may shrink slightly, your withholdings may increase marginally, and your tax refund may be less than you were expecting. However, all economic actions have repercussions, and those will be felt more heavily, if not as soon. Due to increased taxes, especially thanks to the "health care" bill known as "Obamacare," expect to experience more difficulty in finding and retaining employment, and many employers may cut employees' hours back to 28 per week or fewer in order to avoid the "full-time" stipulation for providing health insurance to employees.

Spending Cuts

Here's where things get interesting. The automatic sequester that goes into effect on January 1 will make significant real cuts to certain spending items, "defense" chief among them. While most Republicans argue that "we can't afford" to make cuts to U.S. defense spending, the reality is that the government spends as much on the military as the next 14 nations combined; those expenditures could be cut in half without harming actual defense capacity.

Those cuts, though, would have a widespread effect on large portions of American industry, and would likely result in a significant number of new layoffs from affected companies (though don't expect Lockheed's or Boeing's lobbyists to get pink slips).

Also, since the government's expenditures are included in the nation's Gross Domestic Production (GDP), expect economists to declare that the country has entered another recession if we go over the "fiscal cliff." This is hugely disingenuous, of course, since the government cannot create wealth as it doesn't produce anything, so its inclusion in GDP has masked the fact that private-sector production has been steadily declining, so any increase in GDP has come from increased government expenditures, which have a net negative effect on the economy in the long run.

So, for millennials, if spending really does get cut, expect a bit of a painful correction for a while, which may affect employment, and since most of the problems with the economy are due to much larger issues than simply the rate of taxes or amount that Congress is doling out to military contractors, it's hard to imagine that spending cuts will make a significant difference, but if the lower levels of expenditures hold, then the economy may begin a slow resurrection back to sane levels.

In Conclusion

Don't hold your breath, whatever you do. While Congress shows surprising adeptness and bipartisanship when it comes to destroying the Constitution or infringing on your rights, passing a budget deal isn't something the Republicans and Democrats often agree on, especially since the Houses are controlled by opposite parties. So, either they'll play it out and pass something in the last few days of the congressional term, or they won't do anything, and we'll take a nose dive off of the fiscal cliff.

That being said, there's not really much that can be done to change the current trajectory of the economy, especially as far as the average millennial is concerned. Don't expect the world to end if you wake up in January and Congress hasn't accomplished anything. However, it might be a good idea to keep options open as far as employment goes, and always keep an eye out for opportunities wherever they might appear.

This article originally appeared at JamesLStreet.com