The fiscal cliff was always going to end with a whimper because that was the obvious path of least resistance. In the end, simply avoiding big tax increases and spending cuts while adding a few more trillion to the coming decade’s deficit was rewarded by the markets with a huge rally. Everybody went home happy, or at least still in possession of their political office.
Now we move on to the debt ceiling, which on the surface looks just like the fiscal cliff: A self-imposed set of penalties that can be finessed with the stroke of a pen. But it’s likely to be far messier, for a couple of reasons. First, the republicans got rolled in the fiscal cliff deal because they couldn’t stomach middle class tax increases and defense cuts. They were forced to raise taxes on their main contributors without cutting spending on the democrat base. This was a massive defeat for the supposed party of small government that cannot be repeated short of intra-party civil war.
The other reason is that simply raising the debt limit (for the umpteenth time) might actually have some political downside this time around because it requires admitting that Washington’s debt will rise by another $2 trillion in the next year or two, to around $18 trillion. The human mind doesn’t grasp “trillion” very easily, but it does get round numbers like 20, which is now rapidly approaching. Put that new handle in front of something incomprehensible but ominous like trillion – and then note that a decade ago it was below 10 — and you have, as they say within the Beltway, an optics problem.
The republicans can exploit this to demand spending cuts. The democrats will refuse on principal and counter with tax increases, and both sides will see a reasonable chance of blaming the other if the thing goes sour. So nothing will get done until checks actually stop being sent out. Here is the Wall Street Journal’s Kimberley Strassel on the republicans’ situation:
Strassel: The Debt-Ceiling Fight Will Be Dirty
The GOP thinks it will win, but the party’s strategy is far from clear.
In the classic movie “The Untouchables,” the street-smart cop Jim Malone explains to his golden-boy partner Eliot Ness that things will have to get dirty if they intend to bring down Al Capone: “You see what I’m saying is, what are you prepared to do?” That’s the question for the GOP as it sifts through the ashes of this week’s cliff deal.
The tax-hike extravaganza that President Obama signed on Wednesday was Round One of a bigger deficit fight, and the GOP was battered badly. Poor messaging, an internal tax feud, and a miscalculation of the president’s tactics—all combined to land the private economy with a monstrous tax bill, and the Republican Party with a black eye.
On to Round Two, which will center on the debt ceiling due to hit in February. Republicans are convinced they can win this one. Their thinking? The president can’t use the threat of higher middle-class taxes to force the GOP to yield. Without the middle class as a hostage in the negotiations, they believe, the debt-ceiling debate will be entirely on spending and Mr. Obama’s failure to confront the nation’s $16 trillion debt.
Read More at dollarcollapse.com . By John Rubino.