Debt ceiling blues
Adam Newman | Monday, September 5, 2011
This past summer offered no shortage of entertainment — the NBA Championship, the Casey Anthony Trial, a new season of “The Jersey Shore” and the final Harry Potter movie.
Alongside these, less entertaining, but still critical negotiations over America’s debt ceiling took place. For those who may have spent their summer away from politics, below is an explanation of what happened.
The “debt ceiling” is a term used for the maximum amount of debt that America’s Treasury can issue at any time. Congresses under the control of both parties have procedurally passed bills raising the debt ceiling over the past century. Moreover, presidents from both parties have routinely signed bills raising the debt ceiling into law. According to politifact.com, a non-partisan fact checking service, the debt ceiling was raised seventeen times under Ronald Reagan, four times under Bill Clinton and seven times under George W. Bush.
Raising the debt ceiling is very important because it ensures the American Treasury can fully meet its obligations to creditors, federal employees, Social Security beneficiaries, soldiers and many others. If the Treasury does not make full and timely payments to these groups, America would be considered “in default” on its obligations. A default would lead to a sudden contraction of government spending (roughly 40%), a loss of confidence in the American economy, higher interest rates, lowered home values and a stock market decline. These factors, amidst an already weak economy and major economic problems in Europe, could push America back into recession.
The debt ceiling was last raised in February 2010 from $12.3 trillion to $14.3 trillion. This debt ceiling increase would only last the American government until spring 2011, when the debt ceiling would need to be increased once again. Even though the vote to raise the debt ceiling has historically been procedural, the debt ceiling raise scheduled for spring 2011 was different due to the emergence of the Tea Party. The Tea Party gained major influence in the Republican Party during the Obama Presidency because of its energized opposition to Democratic initiatives and contribution to a strong Republican turnout in the 2010 midterm elections. The Tea Party’s influence shaped the new Republican platform on the debt ceiling — the debt ceiling would be raised only if it was coupled with a deal that included major spending cuts and no tax increases. The Republicans would not compromise on this position, even if it meant an American default. The Tea Party had suddenly changed the debt ceiling vote from procedural to questionable.
On May 16th, 2011, the debt ceiling was “hit” and legislators still had not reached an agreement. Even though the Treasury could not borrow, it was able to meet the obligations of the government by borrowing from government funds and suspending investments. The Treasury indicated that America would default if the debt ceiling was not raised when these measures were exhausted Aug. 2.
Throughout June and July, negotiations continued over the debt ceiling, but no agreement was reached. As summer wore on, analysts began to consider the growing likelihood of an American default and the devastating economic consequences a default would create. But as July ended, the leaders of both parties drafted a bipartisan debt ceiling deal that received major opposition from liberals and conservatives alike. Even with this bipartisan opposition, the deal, titled the “Budget Control Act of 2011”, passed the House on Aug. 1 and the Senate on August 2. President Obama signed the bill into law Aug. 2, just hours before a default.
The Budget Control Act of 2011 has two parts: First, the bill raises the debt ceiling by $1 trillion this year and another $1 trillion in early 2012. Second, the bill reduces discretionary spending by $1 trillion over the next decade and charges a bipartisan committee of legislators with finding another $1.5 trillion in cuts by the end of 2011. If this committee does not reach an agreement, or Congress does not approve the committee’s agreement, $1.2 trillion will be automatically cut from defense and Medicare over the next decade. Legislators punted on the core issues of the debate: taxes and entitlements, planting the seeds for a larger political debate after the 2012 election.
The debt ceiling debate showcased for the American people the embarrassingly poor relationship between the Democrats and Republicans. This rift, along with the weak economy and grim prospects for the future has forced many Americans to ask, “Are our best days behind us?” Only the future can answer this question. But every American, from small-government conservatives to big-government liberals, can agree that for America’s best days to be ahead of us, America’s worst political days must be behind us. Maybe America’s leaders will come to realize this as well.
Adam Newman is a junior Finance major. He can be reached at [email protected]
The views expressed in this column are those of the authors and not necessarily that of The Observer.