In Box

Fiscal Cliff: A Short History

How did the phrase become shorthand for Washington's embrace of budget brinkmanship?

By now, you've probably heard enough about the "fiscal cliff" to know all about the steep, automatic tax hikes and spending cuts that U.S. lawmakers are now scrambling to prevent from taking effect. Even if financial catastrophe is averted, however, the term itself is likely to stick around; it has already become shorthand for the increasingly dramatic measures U.S. leaders have taken to force parties with increasingly divergent visions of the size and scope of government to resolve a steady drumbeat of high-wire budget crises. Think of the cliff as Washington's version of the poison pill: making it more painful for politicians to do nothing than to work together to reduce America's debilitating debt and deficits. And that kind of budget brinkmanship isn't going away anytime soon. If anything, the phrase may now be going global, a sort of unwelcome U.S. export to the rest of the democratic world.

New York City nearly defaults on its debt, with last-minute federal loans and a teachers' union investment in municipal bonds pulling the city back from the brink of bankruptcy. (President Gerald Ford initially withholds federal aid, inspiring the famous tabloid headline "FORD TO CITY: DROP DEAD.") Newsweek describes the debacle as "New York's fiscal cliff-hanger."

The Gramm-Rudman-Hollings Balanced Budget and Emergency Deficit Control Act demands that automatic, across-the-board spending cuts take effect if the federal government misses budget targets, in the first congressional effort to build a fiscal time bomb that will compel both political parties to get serious about balancing the budget. "It's a kind of mutual-assured-destruction theory of fiscal policy," a House Budget Committee staffer explains of the radical new process, known as "sequestration." "What they're doing is they're creating a kind of artificial crisis."

Rep. Henry Waxman (D-Calif.), who at the time heads a congressional subcommittee overseeing Medicaid, becomes the first major politician to use the precise phrase: Oregon, he warns, is "about to fall off the fiscal cliff" because of a decision to limit property taxes, which could reduce state revenues to the point where local leaders are forced to cut medical services to the poor under a Medicaid reform plan.

Shortly after House Republican leader Newt Gingrich rides his "Contract with America" to victory in the 1994 midterm elections and a presidential commission releases a report on entitlement and tax reform, the media starts applying the term "fiscal cliff" to the U.S. federal budget. In an article on the enormous pressure entitlement programs will come under as nearly 80 million baby boomers retire, the San Francisco Chronicle reports that the country will plunge "off a fiscal cliff around 2010" even if a Republican plan to balance the budget by 2002 succeeds. "The pain required to keep the deficit at zero is much, much bigger than anybody is talking about publicly," economist Laurence Kotlikoff tells the paper.

During a period of dizzying economic growth, President Bill Clinton and the Republican-controlled Congress balance the federal budget for the first time since 1969. Clinton vows to parlay the country's budget surpluses into reforming Social Security and Medicare. But the administration's costly proposals, including an ultimately unsuccessful prescription-drug benefit, anger deficit hawks. "Only in America could one define reform as increasing spending on a program known to be heading over the fiscal cliff," the Cato Institute's Doug Bandow laments.

Rep. Charles Rangel (D-N.Y.) balks at President George W. Bush's proposal in his State of the Union address to make permanent a $1.3 trillion tax-cut package enacted in 2001, especially given the administration's free-spending ways. If the cuts are extended beyond their 2010 expiration date, he warns, their cost "will be far greater" than those of Social Security. When that happens, he adds, "we fall off a fiscal cliff."

The Bush administration forecasts a record $455 billion budget deficit after initially predicting a $334 billion surplus for the year, angering deficit hawks like Sen. Kent Conrad (D-N.D.), who warns that Bush's tax cuts will "explode" at the very moment when the baby-boom generation is retiring. "This president is running us right over the fiscal cliff," Conrad complains. "The president says he wants to go to Mars. He's taken the deficit to the moon." That same year, the White House launches a second round of tax cuts and the budget-crushing war in Iraq.

Just weeks after the presidential election -- and only months after the collapse of Lehman Brothers sparks a global financial panic and plunges the United States into its worst economic crisis since the Great Depression -- the term's use as a rhetorical cudgel shifts parties as Sen. Jim DeMint (R-S.C.) attacks President-elect Barack Obama and his economic stimulus plan for the first time. "We are trillions of dollars in debt and Obama's massive new spending program threatens to send our nation over a fiscal cliff, leading to higher taxes and fewer jobs," DeMint argues.

November 2010
An ascendant Tea Party movement -- led by DeMint, among others -- helps the Republicans retake the House in the midterm elections. "We are headed toward a fiscal cliff," Rep. Jeff Flake (R-Ariz.) says a month later, when a bipartisan presidential deficit commission collapses. "I think Congress seems to have the political courage [to address the deficit] only when we are right at that cliff. The difficulty is we don't know where that cliff really is."

December 2010
Obama strikes a deal with Republican lawmakers to extend all the Bush tax cuts until Dec. 31, 2012, even though congressional Democrats want to limit the tax cuts to just the middle class. "I've said before that I felt that the middle-class tax cuts were being held hostage to the high-end tax cuts," Obama says. "In this case, the hostage was the American people, and I was not willing to see them get harmed."

July 31, 2011
After a bitter standoff, Democrats and Republicans avert a sovereign default by reaching an eleventh-hour agreement to raise the country's debt ceiling. Drawing on the decades-old "sequestration" procedure, Vice President Joe Biden and Senate Minority Leader Mitch McConnell agree that if a special bipartisan "supercommittee" can't get a deal by November that trims the budget by more than $1 trillion over 10 years, then steep, automatic spending cuts -- split evenly between defense and domestic spending, with exceptions for some major federal programs like Social Security -- will take effect on Jan. 2, 2013, just after the Bush tax cuts expire.

Aug. 5, 2011
Days after the debt-ceiling deal is reached, Standard & Poor's downgrades the U.S. credit rating for the first time in history. "[T]he effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges," S&P explains.

November 2011
The supercommittee fails to reach a deficit-reduction agreement, triggering the Jan. 1, 2013, deadline -- and a flurry of finger-pointing.

February 2012
In a congressional hearing, Federal Reserve Chairman Ben Bernanke helps popularize "fiscal cliff" as a catchall term for the deficit-reduction showdown that U.S. leaders have set in motion. "Under current law, on Jan. 1, 2013, there's going to be a massive fiscal cliff of large spending cuts and tax increases," he observes. "I hope that Congress will look at that and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date." By March, Bernanke will embrace the phrase as his own, referring to "what I've termed a 'fiscal cliff.'"

May 2012
The Congressional Budget Office reports that though the fiscal cliff would reduce the federal budget deficit by $607 billion, it would also heighten the risk of another recession by causing the U.S. economy to contract at an estimated annual rate of 1.3 percent in the first half of 2013.

November 2012
The day after the U.S. presidential election, traders concerned about the fiscal cliff deal the Dow Jones industrial average its biggest decline of the year. As financial-news network CNBC adopts a new slogan -- "Rise Above" -- in support of a bipartisan deal on the fiscal cliff, liberals back away from the term "fiscal cliff," arguing that the loaded phrase is overly alarmist. The Economic Policy Institute suggests "fiscal obstacle course"; MSNBC anchor Steve Kornacki proposes "gradual fiscal slope"; and the Washington Post's Ezra Klein endorses "austerity crisis." Whatever you call it, the budget standoff has proved to be a pivotal test of America's paralyzed political system.


In Box

Prisoners Rule

Welcome to the deadliest city in the deadliest country in the world.

SAN PEDRO SULA, Honduras — A real estate broker might describe the state penitentiary here as centrally located. From the prison, it's a quick ride to the barrios, where many of the inmates and guards live when they're not inside its crumbling concrete walls -- and also to the fortified residential compounds at the foot of the lush green hills that surround this city, the second largest in Honduras. When there's a riot at the prison, the sirens can be heard in the mansions and the slums alike.

There are often riots at the prison. The most recent one, in May, started when a dispute broke out, allegedly over a woman who'd been smuggled into one of the cell blocks. That ended relatively peacefully, after the bishop of San Pedro Sula negotiated with the inmates to put away their weapons (which are as easy to smuggle into the prison as cell phones, pets, and women). Only one prisoner was killed. A riot in late March was bloodier. Thirteen people died, including a man who was decapitated before his head was tossed in front of the prison gates. According to local news reports, he was a former leader of a faction of prisoners who had become so unpopular they rose up against him. They also killed his dog. "The prisoners rule," assistant prison director Carlos Polanco told the Associated Press in May. "We only handle external security."

Honduras is plagued by such stories. According to a United Nations report last year, Honduras is now the deadliest place in the world. Per capita, more people are murdered here than in any other country, including Iraq and Afghanistan. And it's getting worse. In January, the Peace Corps, whose largest mission used to be in Honduras, pulled all its people out of the country, citing "comprehensive safety and security concerns." Honduras, which has a population of just under 8 million and used to be best known for its bananas and pristine beaches, is now gangland's ground zero, its endless body bags the toll of an endlessly vicious feud between the transnational rivals Mara Salvatrucha and the 18th Street gang.

Their hatred for each other knows no limits, and it defines life in San Pedro Sula, including in the prison, as I learned two weeks before the March riot, when I spent a brutally hot morning inside speaking with inmates. The prison was designed to hold 800 people, but when I visited more than 2,000 were incarcerated there, divided into three cell blocks: one for Mara Salvatrucha, one for 18th Street, and one for the unaffiliated, most of whom were pesetas, deserters who've left one or the other gang. The populations cannot be mixed, or there would be a bloodbath every day, instead of just every few months.

At the 18th Street cell block, a man calling himself El Termite stuck his head out of a small window in a rusted steel door, marijuana smoke and the fumes of cornstarch moonshine wafting out with it. An "18" was tattooed on his forehead, and below his left eye an "LA" in the Los Angeles Dodgers typeface; like most older gang members in Honduras, El Termite had spent much of his life in the United States. Now 31, he's serving a life sentence for two murders, though he admits he has carried out many more. He joined the gang in his teens, drawn in by a sense of belonging and opportunity. Now he is animated mostly by revenge: His 7-year-old son was recently gunned down. "Life here isn't easy," he said. Around the corner, in the courtyard of the Mara Salvatrucha dorm, the stories were much the same.

In the peseta block, they were even worse. When I arrived, a group of shirtless young men massed in front of a gate to speak with me. They were covered in gang tattoos too, but some had begun trying to remove them, as was clear from the razor and knife scars on their bodies. Deserting one's gang is tantamount to being in the opposing gang, and all the men have prices on their heads. On a bar in the gate they'd hitched a couple of mirrors to keep an eye on the Mara Salvatrucha dorm next door and the passageway that led to the 18 dorm.

A man in his late 20s named Jairo told me he left his gang because the new generation is too ruthless. "They kill everybody," he said. He fled to North Carolina but, like El Termite, was deported back. "I feel freer here in jail," he said. "Everybody outside wants to kill us." Like most deserters, Jairo is worth more dead than alive. His corpse will fetch about 5,000 lempiras, or about $260.

SAN PEDRO SULA recently surpassed Ciudad Juárez, Mexico, to become the most dangerous city in the Americas. It may also be the most dangerous city in the world outside Syria. In addition to gang violence, assaults, robberies, and rape are routine, as is extrajudicial violence committed by the police and military. In just the first three months of this year, there were 1,709 killings in Honduras -- a murder rate 20 times that of the United States. In San Pedro Sula, it's 40 times. This murder capital of the world's murder capital sits in a valley near the mountainous border with Guatemala. To the west are the magnificent ruins of Copán, a Mayan royal city, and to the east the Caribbean Bay Islands, a popular scuba-diving destination. Both are crawling with U.S. and European tourists who come by way of San Pedro Sula's modest airport and see little of the city besides the Hilton, Kentucky Fried Chicken, and Dunkin' Donuts on its garish main commercial strip before high-tailing it out of town. Beyond the strip, the city is a welter of barrios and industrial zones. Honduras is still one of Latin America's poorest countries, and its past as a proverbial banana republic is still everywhere in evidence. Plantations and shantytowns surround San Pedro Sula, into which there is only one highway. The country never fully recovered from Hurricane Mitch, which displaced more than a million Hondurans in 1998 and flat-lined the economy for a full year, or from devastating floods four years ago. Even before that, the International Monetary Fund (IMF) estimated that the country's black market made up well over 50 percent of the national economy.

In recent years, even Honduras has become a locus of globalization, however, and San Pedro Sula, studded with foreign-owned factories that have set up shop in search of cheap labor, represents two-thirds of the country's GDP. Increasingly, its residents don't have to migrate to the United States to find work. The unemployment rate in 2011 was an enviable 4.8 percent. This has led to the encouraging rise of a middle class; next to the new factories one often finds bulging communities of modest one-family houses. But they are gated and employ teams of guards. Some have installed barricades and barbed-wire fences. Indeed, armed guards stand in front of just about everything in Honduras. A Payless shoe store I passed regularly kept two men with 12-gauge shotguns and flak jackets on duty all day.

The violence is not confined to the gangs. In 2009, a group of industrialists allied with the military deposed the country's president, Manuel Zelaya, and soon after installed a wealthy landowner from the National Party, Porfirio Lobo Sosa (Pepe, as he is both affectionately and derisively known). Since then, attacks by the police on critics of the government have increased markedly, and the country has taken on both a lawlessness and a militarized air that amazes even jaded Hondurans. A Jesuit priest who runs a local radio station, Ismael Moreno, told me, "The overriding institutional criterion in Honduras is violence."

I met Moreno, a short, rotund man, in his office in an industrial satellite town of San Pedro Sula. Moreno, who also does outreach work with gangs, sweated and smiled as we talked. He got up from his desk and walked over to a map of Central America on the wall and began poking rural Honduras.

In the 1980s, he explained, landowning families like Lobo's began employing bands of former soldiers to keep in check campesinos, or rural workers, demanding better treatment. These paramilitary groups were easy to form and easy to arm: Guns left over from the civil wars and U.S. interventions in neighboring Nicaragua and El Salvador were pouring into Honduras (which the CIA used as a staging ground to aid the Contras). "To buy an AK-47 was as easy as buying a pair of shoes," Moreno told me. But these militias were less easy to disband. When the groups began looking for new sources of income, they allied with Colombian drug traffickers.

At the same time, another criminal phenomenon 2,000 miles away was taking shape that would soon plague the cities of Central America. In the 1980s, in the poor neighborhoods surrounding downtown Los Angeles, immigrants from Honduras and El Salvador, under assault from Mexican organized crime, formed their own gang: Mara Salvatrucha, a slang phrase whose meaning refers to guerrillas or fire ants, depending on whom you ask. It grew rapidly and soon developed a rivalry with 18th Street, a Mexican gang that had formed in the 1960s and had, unlike most Mexican gangs, taken on Central American members.

Both gangs became known for their ruthless violence, the fierce loyalty they inspired and demanded, and their elaborate iconography, tattoos, and lore. Both proliferated wildly. In the 1990s, the U.S. government began deporting gang members en masse, and Mara Salvatrucha and 18th Street were re-exported to Central America, infesting cities like San Salvador, Guatemala City, and San Pedro Sula. They took over entire quarters and instituted a sort of martial law, collecting "war taxes" from local officials and businesses and even issuing permits for civilian traffic. One researcher I spoke with estimates there are 150,000 gang members in Honduras, a country with fewer citizens than New York City. More common estimates place the figure in the tens of thousands.

In the last decade, meanwhile, Mexican cartels have increasingly looked to Honduras, as well as the gangs, for distribution. The U.S. Drug Enforcement Administration estimates that 25 to 30 tons of cocaine, or one-third of the world's volume, now moves through Honduras every month. "Honduras is by far the world's largest primary transshipment point for cocaine," a U.S. official told the Washington Post. And not just transshipment: Last year, anti-narcotics police raided a cocaine-processing lab in the mountains outside San Pedro Sula, reportedly the first facility of its kind in Central America.

The country's politics have struggled -- and failed -- to keep up with the explosion of gangs and drugs. By the time President Carlos Roberto Flores, a Liberal Party stalwart and former newspaper owner, entered office in 1998, the gangs were an overweening social anxiety and a cause célèbre in the media. Flores introduced the first official anti-gang measures, including a liberal-minded reintegration program that met with moderate success. But the violence increased. A group of the country's conservative industrialists and landowners hated Flores and saw to it that his successor came from different stock.

Ricardo Maduro, the Stanford University-educated chairman of the Central Bank of Honduras, was their choice. In 1997, Maduro's son was kidnapped and murdered, a crime that went unsolved and catapulted him, backed by the National Party, into political life. He won the presidency in 2002 and, once in office, introduced a zero-tolerance policy toward the gangs that went well with his name -- the campaign was called Mano Dura, or Iron Fist. He combined military divisions with the police, brought in former New York Mayor Rudy Giuliani to advise, and enjoyed the support of U.S. President George W. Bush's administration. In 2004, Maduro and his public security minister, Óscar Álvarez, implemented sweeping anti-gang laws. Indiscriminate dragnets in the barrios brought in scores of young men arrested on little or no evidence. The prisons swelled. According to an organization that works with street children in Honduras, Casa Alianza, thousands of boys were killed by the authorities. Casa Alianza called Maduro's law a "selective policy of extermination." The result, ironically, was not just an incalculable increase in rancor between the public and the government, but also a calculable increase in violence: Between 2005 and 2010 the homicide rate in Honduras more than doubled.

Judges were instructed to get tough on gang members, according to Guillermo López, formerly the chief criminal justice in San Pedro Sula. I met him in a small office used by human rights lawyers, where he recounted to me a meeting in which a Maduro administration official instructed López and his colleagues to use even the slightest evidence in gang-related cases. The mere supposition of affiliation should be enough to convict, the official told them, and supposition could be based on as little as a tattoo. López told me he refused to go along with the orders. "In most of the cases, there was no proof," he said.

The pressures on judges eased somewhat as Maduro was replaced by President Zelaya. But after the 2009 coup, López was dismissed by Lobo, whom U.S. President Barack Obama recently praised for his "restoration of democratic practices."

Lobo also reinstated Álvarez as public security minister. But even he started speaking up. Last fall, Álvarez declared that at least 20 police commanders in Honduras were allied with drug-trafficking organizations (how he arrived at that number he didn't say). Days later he resigned. That was shortly before the widow of a retired Honduran Army general told reporters that police on a motorcycle had assassinated her husband. A motorcycle assassin also killed a former adviser to the security ministry who was an outspoken critic of police corruption. The Honduran Congress's response has been to ban passengers on motorcycles.

The irony, López told me, is that even as people are charged with being gang members without supporting evidence, actual gang members and other well-funded criminals bribe prosecutors and judges to drop the cases against them. The government has yet to bring a major organized-crime case against the leadership of either Mara Salvatrucha or 18th Street, and it's no wonder, López added: The police aren't just committing a lot of the crimes, but have almost no capacity to solve the crimes they aren't committing. The impunity rate in Honduras -- crimes that go unprosecuted -- is more than 90 percent.

DESPITE SO MANY unsolved crimes, everyone I talked to here seems to have a relative or friend who has been on the inside of San Pedro Sula's teeming tin-roofed hovel of a prison. One young man who had recently been there reluctantly agreed to talk to me one afternoon. Andreas (not his real name), who had recently left the Mara Salvatrucha gang, met me in the lobby of my small hotel. When we sat down to talk, he kept eyeing the security guard nervously, and we retreated to a back courtyard. Then, he worried we were being overheard, so we moved to an alcove inside. He walked with a slight limp from a bullet still lodged in his hip.

Andreas's father died when he was an infant, and he was raised for much of his childhood by his grandmother, while his mother was working in the United States. He was recruited to Mara Salvatrucha by a cousin. "You got a gun, women, drugs," he told me. "They brainwash you." When his cousin was killed, he believed it was his duty to seek revenge. But to join, he had to carry out "missions" -- kill people, in other words, including deserters, police, and suspected snitches. By the time he was 12 years old, he had killed some 15 people by his reckoning. His first, he said, was a local drug dealer who refused to pay taxes to the gang. "It didn't affect me," he said. His friends threw a party for him afterward.

In his early teens he moved to South Los Angeles to live with his mother, a hotel housekeeper, and work as a drug distributor for the gang. At 23, he was deported back to Honduras, he told me. He returned to San Pedro Sula to find that gang life had become almost unbearably intense. There was constant pressure to provide revenue to the leaders, and after never pulling a trigger in California, he had to kill more people to re-prove his loyalty. Young recruits were murderous in a way that repelled even him. "Homies were crazier," he recalled. He took part in a series of public massacres that left dozens of innocent bystanders dead.

When I asked Andreas whether he felt guilty about any of the killings, he said that one did bother him. She was a middle-aged woman, a low-level drug dealer whom the gang supplied. They found out she was "stepping on" the supply, mixing it with talcum powder to increase her profit. So Andreas was sent to kill her. "She was always very nice to me," he said. He said he shot her eight times in the back, as her six children looked on.

Eventually, Andreas came to the realization that for all the talk of loyalty, protection, family -- all that the gangs say they provide -- "it's all bullshit." They're so greedy for revenue that even their rules have a price now, and for about $9,000, Andreas was able to buy himself a way out. How long that will last, he has no idea. It doesn't provide protection from his enemies or the police, only from his onetime friends: Mara Salvatrucha.

"I'm in the hands of God now," he told me. "I killed a lot of people. So I wouldn't be surprised if I was killed."