The proper name for the “fiscal cliff” law is the American Taxpayer Relief Act. Whether it provided relief for taxpayers is an open question (see "A cliff that keeps on giving" in this issue), but it did cause a sigh of relief on Wall Street. On Jan. 2, the day after the bill passed, all major stock indexes—both in the United States and around the world—rose dramatically.
But the fiscal cliff deal relieved only short-term pain, not long-term problems. The spending cuts in the deal weren’t really cuts to the overall budget. They just slowed the rate of growth. U.S. debt keeps piling up, set to rise $4 trillion in the next decade. That’s why Wall Street and Washington now turn to the debt ceiling debate some call the “St. Valentine’s Day Massacre,” anticipating the date the crisis will peak.
Technically, we’ve already hit the debt ceiling of $16.394 trillion. The Treasury Department keeps the lights on by transferring money to and from a byzantine labyrinth of federal government accounts, moving it from where it’s stashed to where it’s needed. But Treasury will run out of options sometime in February or early March.
Until then, look for the level of drama during the debt ceiling debate to rival the fiscal cliff debate, though the plot will be somewhat different. For one thing, we already know how this tragic-comedy has to end. Congress has only two choices: authorize more debt, or shut down the government. And since Congress authorized the spending, the 14th Amendment to the Constitution requires the United States to pay the debt. So the only questions are “how” and “when,” not “if” and “how much.” Americans for Tax Reform’s Grover Norquist says Congress should use the debt ceiling as leverage for more spending cuts. According to Norquist, “For every $1 trillion more in debt, Republicans should ask for $1 trillion in budget cuts.” He also recommends raising the debt ceiling in small amounts to ensure that the spending cuts don’t become empty promises.
Conservatives in Congress, still frustrated by the fiscal cliff deal many of them saw as a sellout of GOP principles, seem ready for a fight. Speaker John Boehner, weakened by the fiscal cliff debate, might not be able to stop it. Sen. Pat Toomey, R-Pa., a Tea Party favorite, said Republicans should not be afraid of a “temporary, partial” government shutdown, even though he acknowledges a shutdown might cause market chaos or a downgrade of U.S. debt. “That would be disruptive,” he said. “But it’s better than the path we’re on. We’ve got to get off the path to Greece.”
Both Toomey and Norquist pointed out that the Senate hasn’t passed a budget in three years, so Congress must pass continuing resolutions, or CRs, to keep the government operating. By passing short-term CRs, conservatives have another lever to force spending cuts.
President Obama has said he wouldn’t play politics with the debt ceiling. “I will not have another debate with this Congress over whether or not they should pay the bills that they’ve already racked up through the laws that they passed,” he said.
But there’s an old saying in Washington: “You can’t take the politics out of politics.” So if the 2012 political season was all about the economy, it’s possible that the 2013 economy could be all about politics—with no relief in sight.