You may have heard people talk about the "fiscal cliff" lately and not known what they were talking about. It's okay — it confuses a lot of grown-ups, too! So we asked Neil Irwin, who writes about the economy for The Washington Post, to explain the basics. After reading this, you can explain it to your parents.
Q: First things first: What does "fiscal" mean?
A: The government spends money — to pay for the military, for example, and for health care for older people. It uses money from taxes to pay for those things. Tax money comes from, among other places, grown-ups' paychecks. The decisions about government taxes and spending are known as fiscal policy.
Q: Okay, so what is the "fiscal cliff," then?
A: Hold on a minute! First you have to understand what the deficit is.
Q:All right, then, what is the deficit?
A: The government frequently spends more money than it raises in taxes. The difference between the two is known as the deficit. It would be like receiving a $20 allowance but buying $25 worth of toys, books and candy.
Q: How can the government do that?
A: The government is able to have a deficit by borrowing money. In the allowance example, it would be like someone buying $25 worth of toys by using his $20 allowance and borrowing $5 from a neighbor, promising to pay it back later. You can see the problem, though: Eventually the neighbor wants to be paid back! So it is better not to have large deficits forever, because eventually you could land in real trouble.
Right now, the U.S. government is borrowing A LOT of money: $1.1 trillion last year! (Can you figure out how many zeros that number has?) That number is so big it's hard to even imagine, but it adds up to about $3,500 for every man, woman and child in America — including you!