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Fiscal cliff hanger: What if there’s no deal?

In our last post we looked at each side’s offer in the negotiations to avoid the “fiscal cliff,” and what a final deal might look like. However, it’s possible (perhaps likely) that the talks will fail. Here’s why some members of each party want to go over the cliff… and what would happen next.

Why some Republicans want to go over the cliff

Republicans don’t have a lot of leverage in the current negotiations, since the thing that they are most opposed to– raising tax rates on the wealthy– is (1) unpopular and (2) will happen automatically when the Bush tax cuts expire on January 1.  The GOP realizes this and has reportedly prepared a “doomsday plan,”:

It’s quite simple: House Republicans would allow a vote on extending the Bush middle class tax cuts (the bill passed in August by the Senate) and offer the President nothing more: no extension of the debt ceiling, nothing on unemployment, nothing on closing loopholes. Congress would recess for the holidays and the president would face a big battle early in the year over the debt ceiling.

It’s a little unclear what would happen to the massive defense and domestic spending cuts that are also scheduled to happen on January 1. Congress would likely attach a deferral or cancellation of these cuts to the vote extending the middle class tax cuts. If they didn’t, those spending cuts alone could push us back into a recession (according to the Economic Policy Institute, extending the middle-class tax cuts only eliminates about 11 percent of the cliff’s economic impact).

In any case, Republicans think they have more leverage if they threaten not to raise the debt ceiling unless Democrats agree to big spending cuts. Why? As a senior Republican in Congress told ABC News:

“You don’t take a hostage you aren’t willing to shoot.” Republicans aren’t willing to kill the middle class tax cuts, even if extending them alone will make it harder to later extend tax cuts on the wealthy.

However, failing to raise the debt ceiling would be catastrophic (to see why, check out our post from the last time we nearly hit the debt ceiling), likely causing a global financial crisis. Apparently the U.S. economy is a hostage Republicans are willing to shoot.

Why some Democrats want to go over the cliff

The Republicans’ plan counts on the White House being so afraid of the U.S. defaulting on its debt, that they’ll simply give in to GOP demands. But according to The Washington Post’s Ezra Klein:

My reporting suggests the opposite: The White House is utterly steadfast in its insistence that it will not permit the debt ceiling to be used as leverage against it again. White House officials see this as a matter of good governance. It would be irresponsible of them — a breach of trust with their successors — to permit this kind of economic brinksmanship to become the norm.

Democrats in the Senate have the President’s back on this one. Obama’s fiscal cliff proposal included a plan in which the President and not Congress would propose debt limit increases from now on. Congress could still vote to disapprove of raising it, but the President could then veto the disapproval resolution, allowing the debt ceiling to rise unless Congress had a veto-proof majority. Senate minority leader Mitch McConnell thought he saw an opportunity here:

McConnell assumed that Senate Democrats — at least a big chunk of the caucus, anyway — would balk at Obama’s proposal, so he introduced the plan himself. The point was to have Dems object to McConnell’s effort, so the Minority Leader could get a new talking point: the president’s offer is so offensive that even his own party isn’t willing to support it.

Instead, McConnell’s maneuver backfired. Reid agreed to hold a vote, and when it was clear that most Democrats would support the President, McConnell ended up filibustering his own bill. Oh, and another layer of irony here: Obama’s proposal– which McConnell is now working so hard to defeat– is identical to a temporary measure passed last year to defuse the debt crisis. The author of that provision? Mitch McConnell.

Business leaders also aren’t thrilled with another debt ceiling standoff, since even the possibility that the U.S. might default on its debt is bad for the economy. One of the most influential business groups in Washington, The Business Roundtable, is reportedly poised to endorse Obama’s proposal to take responsibility for raising the debt ceiling away from Congress.

With business leaders and Democrats united, it’s looking like Republicans don’t gain much more leverage by forcing a debt ceiling crisis than they have in the fiscal cliff talks. This has led some liberals to suggest that simply going over the fiscal cliff–  letting the Bush tax cuts on the wealthy expire, and then cutting a deficit deal– would be to their advantage. Ezra Klein explains their thinking:

The White House will find the negotiations easier, not harder. After all, they’ll already have banked $1 trillion in tax revenue. They’d be much closer to their goal, and their offer of another $600 billion in spending cuts in return for another $600 billion in tax revenue (delivered, this time, through tax reform) will sound perfectly reasonable to most Americans.

What happens if Congress doesn’t raise the debt ceiling?

Until Congress gives up control of the debt limit, both houses of Congress will have to vote to raise it in February. If they refuse, President Obama might be able to declare the debt ceiling unconstitutional under the 14th amendment, according to Yale constitutional law professor, Jack Balkin. Another option would be for the Treasury to make a couple of trillion dollar platinum coins, to be deposited in the federal reserve. Seriously.

But the most likely option, according to Balkin, is that the Obama administration would shut down parts of the government so that it doesn’t default on its debt, which in theory would prod Congress to act.

What does all this mean for health care?

Like we mentioned earlier, if there’s no fiscal cliff deal, then Congress would likely defer or cancel the automatic spending cuts to domestic spending. But in case they don’t, the Kaiser Family Foundation has a great FAQ on what going over the fiscal cliff would mean for healthcare (spoiler: some cuts in Medicare payments to health care providers and big cuts to medical research).

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