In the last round of the Washington budget debates—the fiscal cliff—a compromise was finally reached, whereby the Bush administration tax cuts were extended for the vast majority of the population, while taxes went up on people with incomes over $400,000 (or $450,000 for joint filers). In addition, the expiration of the payroll tax waiver raised taxes on everyone with wage income.

You probably remember this. It was only a couple of weeks ago.

The story today is the President’s State of the Union address last night. He made many points, but all centered around the role of government in the economy. Implicit in his program was the presumption that government can engineer outcomes superior to what the market would create. Also implicit was the notion that government can be key to kick-starting growth. Are those presumptions right, and can the President’s proposals really start to create a better outcome?

Let’s step back a moment and consider what “growth” means. If we are looking at a pie, any way we slice it, for someone to get more, someone else has to get less. This is how much of the debate on spending and taxes has been framed so far—either we cut spending or raise taxes, because the pie is only so big.

First of all, an apology—I didn’t post yesterday. I was in New York at a Morgan Stanley conference, and I blithely assumed that Wi-Fi connectivity would be available. For some reason, which was not the fault of the venue or the sponsor, I could not connect with my laptop. Even on the train home, the Wi-Fi was out for the first hour of the trip, and by that time, it was too late in the day to post.

It is surprising how dependent I have become on connectivity. I have a Mac Air laptop, which I love, and it usually works seamlessly with all sorts of connections, but not yesterday. And trying to connect with only an iPhone, which was heaven just a couple of years ago, was instead incredibly frustrating. How quickly we get spoiled. It was not all that long ago that I refused to even carry a cell phone.

I mentioned the other day that the narrative in our country has changed and that the focus now is on what is going right. The news today supports this notion yet again. New unemployment claims came in at a five-year low, and housing continues to strengthen.

I’ve said it before and will say it again: the debt ceiling debate, coming shortly, is the real thing we need to worry about. The deal over the fiscal cliff settled the immediate risk to the economy—although everyone’s taxes went up, they went up much less than they could have, and spending power was therefore preserved. Spending cuts, which will hit at the same time as the debt ceiling, will also be a headwind to the economy, but they are necessary and can be phased in to cause minimal harm. The one thing that could really blow us up is failure to resolve the debt ceiling issue. This is why it is actually encouraging to see active planning for failure. Given the risk, we should have a plan.

I talked in a previous post about the political options —how the Senate has, twice now, cut a deal with White House approval and essentially dared the House to vote it down. That remains, in my opinion, the most plausible option, but there are others, which range from the serious to the absurd. Let’s start with the serious:

1. A Senate deal forced through the House. This has been done successfully before, but it looks more questionable this time, as the House will be expecting it. Each time, it has been more difficult and resulted in a shorter-term solution. There may be one more bite on the apple, but it is not certain. Feasibility: Medium to high, but any solution would be short term and probably partial.
2. Scrip could be issued instead of actual cash payments once the Treasury hits the wall, enabling operations to continue despite the debt ceiling. The scrip would not be debt because it would not pay interest and would not mature, but it would be a cash alternative that would be transferable, probably to financial institutions, at a high percentage of face value. This method was used by California in 2009. Although there would certainly be problems with this solution, there is precedent—it worked in California—and there appear to be no insurmountable constitutional problems. This proposal is detailed in an article in today’s New York Times. Feasibility: Pretty high.
3. The trillion-dollar coin. Among others, Paul Krugman has proposed that a platinum coin with a denomination of $1 trillion be issued and deposited at the Federal Reserve, which would then transfer the money to the Treasury’s account. Voila! No more problem. There is apparently a clause (intended for commemorative coins) that allows the Treasury to mint platinum coins of any value it wants. It’s tough to know even where to start discussing the problems with this option, but it does seem to be legal, and economically it is not that different from what we are doing now. The problems would be political, and they would be big. Feasibility: Low.
4. The president could plausibly invoke the 14th Amendment to lift the debt ceiling, based on the language “the validity of the public debt of the United States . . . shall not be questioned.” The White House recently ruled this out, but it could remain an option if necessary. The downside? The questionable legality, the almost certain legal challenge, and the potential constitutional crisis would not really reduce the uncertainty. Feasibility: Very low.
5. A grand bargain. Both sides could come together on a deal that raises the debt ceiling and has a credible mix of spending cuts and tax reform to create a sustainable solution over time. Feasibility: Very low, unfortunately.

“The tax issue is finished, over, completed.” — Mitch McConnell

“The tax issue is resolved.” — John Boehner

Much of today’s press coverage highlights the points I made yesterday—that is, how the fiscal cliff deal hasn’t really solved any of the problems and just sets the table for the next crisis in a couple of months. All true, but we are where we are.

Now, the question is this: How do we prepare for and resolve the next crisis? I think everyone agrees this is no way to run a railroad. What we’ve learned in the latest debacle, though, is that there is a way around the current dysfunction.

The news this morning is that at the last minute, after actually going over the cliff, our government officials have successfully covered their butts and kicked the can down the road for another two months. If that doesn’t sound like a ringing endorsement, it isn’t.

Let’s look at what the legislation actually does. Today, the Washington Post published a good cheat sheet.

The stories today are all around the fiscal cliff, of course, and the woeful inability of Congress to accomplish anything other than trying to shift the blame. One of the most annoying memes is how annoyed the representatives are to be stuck in Washington over the holidays.

Back in 2011, during the last debt ceiling debate, the U.S. went into what could reasonably be described as potential default territory. We are nowhere near as close to that as we were then, but we are starting the downward slide, with Treasury Secretary Tim Geithner quoted over the weekend as saying that we will hit the federal borrowing limit on Monday (i.e., New Year’s Eve), which is to say in a couple days.

At that point, the Treasury will start to take certain “emergency” measures—I put that in quotation marks because we were here in 2012, and the only emergency is Congress’s unwillingness to act—which will allow the government to pay its bills for a limited time, probably a couple months, and avoid a full-blown debt crisis for that period. Timing is uncertain because it depends largely on the tax and spending agreements reached with respect to the fiscal cliff. How much money is raised and spent will be critical in determining how long the Treasury can juggle bill payments. We won’t know that until—and if—Congress acts on the fiscal cliff.