The Fiscal Cliff explained

Five things you need to know about the (totally manufactured) term

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1. The 11th-hour deal to limit the damage from the U.S. from driving over the “fiscal cliff” on Dec. 31 is being hailed as a success insomuch as it averts an immediate crisis (pushing the world’s largest economy into recession) and represents a rare bipartisan agreement in Washington (although a deal was inevitable given the dire consequences). Under the bill, which is expected to be made retroactive to Jan. 1, income and capital gains taxes raised on the wealthiest Americans for the first time in decades. However, a payroll tax holiday will also be allowed to expire for all American workers. What the deal didn’t address is the other half of the so-called cliff: hundreds of billions worth of planned spending cuts and the debt ceiling.

2. The fiscal cliff was a totally manufactured term referring to a self-manufactured crisis on the part of the U.S. government. It started during another self-manufactured crisis, the debt ceiling crisis of 2011, when as an attempt to kick the can down the road on that fake crisis, the Congress decreed that a “supercommittee” would have to come up with a mix of tax increases and spending cuts. If the supercommitee did nothing by Jan. 1, 2013, a mix of heavy spending cuts and tax increases totaling an estimated $600 billion would happen automatically. Inevitably, the supercommitee turned out not to be so super, and the Congress was faced with trying to pass a law to avoid the problems they could have avoided by simply raising the debt ceiling cleanly in 2011.

3. The fiscal cliff follies are simply a trial run for the next fake crisis, which will occur this year when Congress has to raise the debt ceiling again. Traditionally, the debt ceiling was simply a fait accompli, since it’s just a formality that most countries don’t even have. But during the Obama administration, the Republican House has decided to use the debt ceiling to extract concessions on taxes and spending. Their supporters argue that the U.S. has a spending crisis that needs to be dealt with before the debt ceiling is raised; their detractors accuse them of holding the full faith and credit of the U.S. hostage. But one thing is for certain: this is the new normal, at least while the Republicans control the House – and thanks to gerrymandered districts, they are expected to control the House for the next decade. The “fiscal cliff” was just a preview of things to come.

4. By bringing the Senate’s “fiscal cliff” bill to the House floor, Speaker John Boehner may have broken one of the most notable rules of the Republican Congress: the “Hastert rule,” created under former Speaker Dennis Hastert. It decreed that bills would not be brought to the floor unless they could get the necessary 218 votes from Republicans alone. If the Republicans did not support a major bill enough to pass it, it would not be passed with a mix of Republican and Democratic support. This rule was meant to strengthen partisan control over the House, as well as to deal with the increasing partisan split in the House (both Democrats and Republicans, when they are in the minority, often band together to deny any support to the opposing party’s bills). But when he was unable to cobble together 218 Republican votes for an amended version of the Senate bill, Boehner essentially threw up his hands, brought the Senate bill to the floor, and passed the bill with a majority of Republicans opposing it – and with several people who are after his job, like Majority leader Eric Cantor, voting against it. It’s a major blow to Boehner’s ability to command a majority of his caucus, if nothing else.

5. World markets are reacting positively to the fiscal cliff deal, but the respite will be brief. The U.S. still needs to hammer out a long-term solution to its debt crisis and figure out a way to get the economy rolling again. And despite the most recent deal, there’s little reason to be optimistic that Republicans and Democrats have suddenly discovered the art of compromise. They had well over a year to figure out a way to avoid the self-imposed fiscal cliff, but were unable to do so until the very last minute. And even then, they were forced to put off finding a more comprehensive solution for a few more months. In the meantime, the fate of the U.S. economy—and Canada’s—hangs in the balance.