Similar logic applies to the reduction of national income. If people are laid off, they spend less money on products and services. Businesses sell less and have lower income. The reduction in national business income and national employment will lead to a reduction of national income. (Roughly defined as Gross Domestic Product.) Reduced national income also has a multiplier effect further reducing national income and employment. The economists at the CBO estimate that this tax increase and spending cut could result in an additional 3 million Americans being unemployed. They also estimate that the country will have 2.9% less income to spend.
There is also a psychological aspect to the fiscal cliff. Many analysts believe that individuals, investors and businessmen in this country are in economic limbo because they are concerned about the "fiscal cliff". The business and financial community does not like uncertainty. They do not know whether the US will go over the fiscal cliff and enter a recession. They prepare for the worst. Consequently, they save money and do not spend money today because in a recession "Cash is King". If the fiscal cliff were to be eliminated, these individuals, businesses and investors might be more inclined to spend money. This would immediately help stimulate the economy.
The fiscal cliff is a direct result of the failed leadership of the Obama administration. The President created this problem by failing to get congress to agree on a responsible fiscal policy and trying to put off the difficult tax and spending issues by "kicking the can down the road." Obama rationalizes his responsibility for creating the fiscal cliff by saying that he wants to prevent a tax cut for the rich. He has clearly stated that he wants to raise taxes on the rich even if it does not stimulate the economy or create additional tax revenue because it is "the right thing to do!" Isn't stimulating the economy and creating jobs for unemployed Americans "the right thing to do?" A competent President would not tolerate a fiscal cliff during a tepid recovery.
Bernie Sanders and Robert Reich Are Confused by Economics. And Government. And Reality | Seton Motley