See if you can figure out why:
Click images to enlarge
This first figure shows that aggregate demand growth has not been affected by a tightening of fiscal policy since 2010. Specifically, it shows that nominal GDP (NGDP) growth has been remarkably stable since about mid-2010 despite a contraction in federal government expenditures. The same story emerges if we look at the budget deficit relative to NGDP growth:
Both figures seriously undermine the argument for countercyclical fiscal policy and suggest a very a low fiscal multiplier. They also indicate that the Fed has been doing a remarkable job keeping NGDP growth stable around 4.5%. Monetary policy, in other words, appears to be dominating fiscal policy in terms of stabilizing aggregate demand growth. This in turn implies that the Fiscal Cliff should not be a big deal if the Fed continues to stabilize NGDP growth around 4.5%. Yes, there would still be distributional and incentive changes if fiscal consolidation occurs, but the fiscal tightening itself should have no bearing on aggregate demand if the Fed continues to do its job. As I noted before, the Fed is the other solution to the Fiscal Cliff. Lars Christensen agrees.
P.S. Though the Fed has been doing a remarkable job keeping NGDP growth stable since mid-2010, it has yet to allow a period of catch-up nominal spending growth that would return NGDP to its pre-crisis trend. So the Fed's work is not complete.