Never Mind the “Fiscal Cliff”; the Real One is Just around the Corner

By Michael Califra

While the national news media is obsessed with the “Fiscal Cliff” circus in Washington, there is another event on the horizon that poses real and dangerous consequences for the national and the global economy – raising the debt ceiling.    

There are a lot of misconceptions about what raising the debt ceiling means and what it does not mean, mostly pushed by people with an anti-government agenda. Raising the ceiling does not mean the government is voting on new spending. It does mean that the government is voting to borrow money to pay bills coming due for spending in the past.

Fiscal-Cliff

But if the Constitution gives Congress the power to authorize spending, why do we require a second vote on whether to allow the borrowing to pay for that spending?

The reason dates back to the First World War. In 1917, the government was issuing Liberty Bonds to fund the war effort.  Issuing that debt was controversial at the time, so congress passed a law putting a limit on borrowing to show that it was fiscally responsible. From the beginning it was nothing more than political theater. The government was going to spend whatever was needed to win that war, no matter how much it had to borrow.

Yet for 94 years, the debt ceiling remained as political theater; an opportunity for the party in opposition to lambast the party in power for their “big spending” ways before everyone inevitably voted to raise it. The vote itself became a mere formality with the outcome never in doubt because the consequences of not raising the debt ceiling were too catastrophic to contemplate. Those consequences would begin almost immediately with the Treasury forced to stop paying some of its financial obligations in order to pay others.

Payment of military salaries, Social Security and Medicare outlays, unemployment benefits and payments to government suppliers would suddenly be in doubt. The resulting turmoil and uncertainty would cause the public and businesses to simultaneously pullback spending, throwing the economy into a severe recession with surging unemployment and plunging capital markets. The government would be forced to pay skyrocketing interest rates as investors lost faith in Treasuries – the backbone of the world financial system – and demanded a significant risk premium on US debt. The contagion would quickly spread around the world, leading to insolvent banks and creating a global financial crisis that would dwarf what we experienced in 2008. The US would eventually exit the carnage a fundamentally changed nation both at home and in the eyes of the world.

That scenario has been easily avoided for more than nine decades by the simple common sense of the people we sent to Washington, regardless of their party affiliation. But in 2011, all that ended.

After the 2008 election of President Obama, a faction of the Republican Party’s base with a fanatical anti-tax and spending ideology was repackaged by big-moneyed interests as the Tea Party. In the 2010 midterm elections they played a major role in taking the House of Representatives away from the Democrats. The Tea Party entered Congress in 2011, unyielding and unwilling to compromise on their ideology. When the debt ceiling had to be raised that summer, they resorted to political extremism, holding the debt ceiling hostage to huge budget cuts and the passage of a balanced budget amendment to the Constitution, pushing the confrontation both with the Democrats and the establishment of their own party to within days of a US debt default. Only a last-minute deal – one that created the “Fiscal Cliff” now consuming Washington – avoided the unthinkable.

Yet, more disturbing than the Tea Party’s recklessness was their ignorance. Many in their ranks seemed not to know or care what the debt ceiling actually was or what a US default would mean to the world. Representative Michelle Bachmann said on Face the Nation that warnings by economists about the consequences of not raising the debt ceiling were nothing more than a “scare tactic” suggesting that a default would mean nothing any of significance; Tea Party Senator Jim DeMint was either totally confused or being deliberately disingenuous when he said on CNN’s State of the Union, If we never raise the debt ceiling again, we’re going to pay our bills, we’re going to pay Social Security. …We won’t default.”

Congressman Paul Broun actually introduced a bill to lower the debt ceiling, which cannot be done any more than an individual can casually decide to lower his credit card statement because he thinks the bill is too high. This combination or arrogance and ignorance and the chaos it brought to Washington caused Standard and Poor’s to downgrade the nation’s credit rating, removing it from its list of risk-free borrowers for the first time.  S&P’s report stated, “The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.” In other words, what had been solidly predictable for decades became suddenly unpredictable, thanks to the antics of the Tea Party.

This is what the world has to fear when the debt ceiling inevitably has to be raised at some point early in 2013. President Obama recently said he won’t permit the US economy to be held hostage to the debt ceiling again, and there have been a number of proposals to take the authority for raising the debt ceiling out of the hands of Congress.  Yet, despite losses in the November elections that reduced the size of the Tea Party caucus in Congress, there is no sign of sanity reappearing in the Republican Party.

Earlier this month, Senate Minority Leader Mitch McConnell, intimidated by the threat of a Tea Party primary challenge in his reelection bid in 2014, filibustered his own bill giving the power to raise the debt ceiling to the president to use at his discretion. Soon thereafter, Speaker of the House John Boehner, whom many Tea Partiers want to see replaced by Majority Leader Eric Cantor, made the nonsensical statement at a press conference that changing the process for raising the debt ceiling would somehow amount to Congress giving up “the power of the purse”, further reducing the chances for reform. All of this shows that the inmates are still in charge of the Republican Party asylum, and are preparing to use the threat of economic calamity to extort policy concessions they would not get otherwise, including slashing programs like Social Security and Medicare. So hold on to your hats, folks. Things could get scary very soon.

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