Thu., January 10, 2013 1:00pm (EST)

Three New 'Cliffs' Threaten The Economy
By Marilyn Geewax
Updated: 1 year ago

Traders work on the floor of the New York Stock Exchange Jan. 2. Financial market participants will be keeping a close eye on upcoming deadlines affecting the U.S. debt ceiling, scheduled automatic budget cuts and federal funding.
Traders work on the floor of the New York Stock Exchange Jan. 2. Financial market participants will be keeping a close eye on upcoming deadlines affecting the U.S. debt ceiling, scheduled automatic budget cuts and federal funding.
Maybe you were hoping you'd never hear the phrase "fiscal cliff" again after Congress passed legislation Jan. 1 to address that tax-break-expiration deadline.

Sorry.

Three more cliff-type deadlines are fast approaching. They involve: 1) raising the federal debt ceiling 2) modifying automatic, across-the-board spending cuts and 3) funding the government to avert a shutdown.

The deadlines all hit between Valentine's Day and Easter, which means new rounds of chaotic congressional negotiations may start up just after the Jan. 21 presidential inauguration parade ends.

Indeed, President Obama's choice for his second-term Treasury secretary is a budget-battle warrior, Jack Lew. During his first term, Obama chose a banking expert, Tim Geithner, to head the Treasury Department. Now Obama needs a budget expert like Lew, the former head of the Office of Management and Budget, to lead the White House negotiations with Congress.

To understand why this winter may be so bitter in Washington, let's take a look at each of the cliffs those dates when Congress could tip the U.S. economy over into recession or worse.

But first, refresh your hazy New Year's Eve memories. The first big cliff that Congress averted involved the Dec. 31 expiration of Bush-era income tax breaks. On Jan. 1, Congress passed legislation to ensure that 99 percent of income taxpayers would not see any changes in the new year and beyond.

Now, welcome to the next cliffs.

The Debt Ceiling. This one comes first, and poses the greatest danger to the economy. If Congress fails to act by the middle of February, Wall Street analysts say, financial markets could crash and trigger a global depression.

The roots of the problem go back to 1939 when Congress set a limit on how much debt the Treasury could issue. Since then, the country's population has been expanding, inflation rising and debt growing. So time and again, Congress has needed to bump up the debt ceiling.

In all, Congress has raised the debt cap more than 100 times under both Democrats and Republicans. For example, during the Reagan years, lawmakers boosted the limit 18 times.

But today, many Republicans, alarmed by the nation's ever-rising debt of $16.4 trillion, are insisting that Congress cut spending rather than borrow more.

The current debt ceiling was actually hit just as 2012 came to an end. Since then, the Treasury has been using "extraordinary" measures to keep paying whatever is owed to investors who hold U.S. debt instruments. But the department will run out of accounting tricks as early as mid-February.

Unless the debt ceiling can be raised by then, Treasury will have to find new and painful ways to raise money to avoid default. So, for example, it could stop sending Americans their Social Security checks, veterans' benefits, income tax refunds and food stamps. Such moves would be extremely unpopular but perhaps less damaging than the alternative.

Whenever a nation fails to repay its lenders, "interest rates spike, stock and bond markets fall sharply, the value of the currency declines dramatically, and the country quickly falls into a deep recession," said economist Robert Shapiro, co-founder of Sonecon LLC.

Obama says the matter is nonnegotiable. "One thing I will not compromise over is whether or not Congress should pay the tab for a bill they've already racked up," Obama said in his weekly radio address.

But Senate Republican leader Mitch McConnell, speaking on NBC Sunday, suggested that Republicans might be willing to see the nation default to force spending cuts. "It's a shame we have to use whatever leverage we have in Congress to get the president to deal with the biggest problem confronting our future, and that's our excessive spending," he said.

The last time the government faced a debt-ceiling crisis, in August 2011, Republicans agreed to raise the borrowing limit only after putting into place automatic, across-the-board spending cuts set to take effect in 2013. That brings us to the next cliff ...

Sequestration. During that 2011 debt-ceiling battle, lawmakers set up the so-called sequestration process to impose $109 billion in spending cuts each year for a decade unless they could agree on a deficit-reduction plan by the end of 2012. Such a plan never came together.

Instead, on Jan. 1, Congress pushed the sequestration deadline to March 1. Unless Congress takes new action, the automatic spending cuts would kick in and likely cause enormous job losses, especially among Pentagon contractors.

"Sequestration could be expected to result in layoffs or reductions in force for about half a million of those employees. But because of the uncertainty that we are likely to continue to face with respect to which contract will be affected and by how much, layoff notices may likely be sent to several times that number of people," according to a report by the Center for American Progress, a research group.

Congressional Budget. Each year, Congress is supposed to pass a budget that sets spending priorities. The GOP-led House passes budgets annually, but only ones that Senate Democrats would never approve. Because of the partisan stalemate, Congress has not completed a budget since April 2009. Instead, lawmakers pass short-term "continuing resolutions" to keep government running.

The current resolution expires March 27. Congress must pass a new one or the government will have to shut down its "nonessential" functions, such as building roads, running national parks and supporting medical research.

Sen. John Cornyn, R-Texas, in a recent op-ed for the Houston Chronicle, said: "It may be necessary to partially shut down the government in order to secure the long-term fiscal well-being of our country, rather than plod along the path of Greece, Italy and Spain."


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