The United States debt ceiling crisis was a congressional debate that took place in 2011 and threatened a US default.[1] The financial consequences were felt worldwide.[2]
The debate was about increasing the upper limit of the debt ceiling of the United States government, whether or not it should be increased, and by what amount. It revolved around how to structure spending and taxation to fund the United States public debt.[3] The debate proposed structural changes to the budgeting process such as spending caps and a Balanced Budget Amendment to the United States Constitution).[4]
The United States Department of the Treasury has no authority to issue or incur debt beyond the debt ceiling.[5] However, on December 16, 2009, the amount owed by the US government surpassed the statutory limit, and the debt ceiling was exceeded. To avoid default, the Treasury Department used “extraordinary accounting tools" to create an additional $150 billion available to meet the necessary federal obligations.[6]
The total national debt of $14.4 trillion exceeded the $14.3 trillion previously determined ceiling in July 2011. In contrast to 2009,[6] the situation in 2011 had the potential to become a crisis and to disrupt financial markets, if the government failed to meet its financial obligations.[7]
The concern extended beyond the US to countries that held or invested in the United States dollar.[8] Credit rating agency Standard & Poor's placed US debt rating under "negative credit review" during the crisis, which signaled an increasing risk of a downgrade to the US excellent credit rating.[9] Following the debt ceiling crisis, Standard & Poor's downgraded the credit rating of the United States from AAA to AA+ with a negative outlook.[10][11]
The debate was contentious, with nearly all Republican legislators opposing any increase in taxes and the large majority of Democratic legislators viewing tax increases as necessary along with spending cuts. Supporters of the Tea Party movement pushed Republicans to reject any agreement that failed to incorporate large and immediate spending cuts or a completed balanced-budget constitutional amendment.[12][13]
The immediate crisis of 2011 ended when a complex deal imposing limits on both debt and government spending was reached on July 31. After the legislation was passed by both the House and Senate, President Barack Obama signed the Budget Control Act of 2011 into law on August 2, the day of the deadline.
What is the debt ceiling?
See also: United States public debt#Debt ceiling.
If the Treasury does not collect enough in revenue to pay for expenditures by the federal government, it may be authorized by Congress to issue debt (in other words, borrow money) to pay for the federal budget deficit. Prior to 1917, Congress had to authorize each round of borrowing directly. In 1917, in order to provide more flexibility to finance the United States' involvement in World War I, the Congress instituted the concept of "debt ceiling". Since then, the Treasury can only borrow money as long as the total debt (excepting some small special classes) does not exceed a ceiling stated by law.[citation needed] To change the debt ceiling, Congress must enact specific legislation and the President must sign it into law.
The process of setting the debt ceiling is separate and distinct from the regular process of financing government operations, and raising the debt ceiling neither directly increases nor decreases the budget deficit. The U.S. government passes a federal budget every year. This budget details projected tax collections and outlays and, therefore, the amount of borrowing the government would have to do in that fiscal year. A vote to increase the debt ceiling is, therefore, usually seen as a formality, needed to continue spending that has already been approved previously by the Congress and the President. The Government Accountability Office explains, "the debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred."[14] The apparent redundancy of the debt ceiling has led to suggestions that it should be abolished altogether.[15][16]
The United States has had public debt since its inception. Debts incurred during the American Revolutionary War and under the Articles of Confederation led to the first yearly report on the amount of the debt ($75,463,476.52 on January 1, 1791). Every President since Harry Trumanhas added to the national debt expressed in absolute dollars. The debt ceiling has been raised 74 times since March 1962,[17] including 18 times under Ronald Reagan, eight times under Bill Clinton, seven times under George W. Bush and three times (to August 2011) under Barack Obama.
As of May 2011, approximately 40 percent of US government spending relied on borrowed money.[18] Raising the debt ceiling would allow the federal government to continue to borrow money to support current spending levels. If the debt ceiling is not raised, the federal government would have to cut spending immediately by 40 percent, affecting many daily operations of the government.[18] The Treasury would determine what items would be paid.[19] If the interest payments on the national debt are not made, the United States would be in default, potentially causing catastrophic economic consequences for the U.S. and the wider world as well. (Effects outside the U.S. would be anticipated because the United States has a very high GDP. With the world's largest single national economy, the U.S. is a major trading partner to many countries, including other major world powers who hold its debt and could demand repayment.)
According to the US Treasury, "failing to increase the debt limit would... cause the government to default on its legal obligations – an unprecedented event in American history".[20] These legal obligations include paying Social Security and Medicare benefits, military salaries, interest on the debt and many other items. If the debt ceiling is not raised, then the Treasury will prioritize the items to pay with its ongoing revenue stream. Treasury could choose to pay interest so that the U.S. does not default on its sovereign debt.[21]
Then-Senator Obama opposed one of those increases to the debt ceiling under Bush and criticized Bush for a lack of leadership. "The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. It is a sign that the U.S. Government can't pay its own bills," Obama said before a March 16, 2006, vote on raising the debt limit. The Senate narrowly approved raising the limit along partisan lines, 52–48, with all Democrats opposed.[22]
Recent concern about budget deficits and long-term debt
Underlying the contentious debate over raising the debt ceiling has been a growing anxiety since 2008 about the large United States federal budget deficits and the increasing federal debt. According to the Congressional Budget Office (CBO): "At the end of 2008, that debt equaled 40 percent of the nation's annual economic output (a little above the 40-year average of 37 percent). Since then, the figure has shot upward: By the end of fiscal year 2011, the Congressional Budget Office (CBO) projects federal debt will reach roughly 70 percent of gross domestic product (GDP) – the highest percentage since shortly after World War II." The sharp rise in debt after 2008 stems largely from lower tax revenues and higher federal spending related to the severe recession and persistently high unemployment in 2008–11.[23][24]
§ In 2009, the populist Tea Party movement emerged; one of its chief concerns was increased government spending.[25][26]
§ In early 2010, Obama established the Bowles-Simpson Commission to propose recommendations to balance the budget by 2015.[27] The commission issued their report in December 2010, but the recommendations were never adopted.
§ The Tea Party helped usher in a wave of new Republican office-holders in the 2010 mid-term elections[28] whose major planks during the campaign included cutting federal spending[29] and stopping any tax increases.[30] These new Republicans and the new Republican House majority greatly affected the political debate in 2011 on raising the debt ceiling.[31]
§ Throughout 2011, Standard & Poor's and Moody's credit rating services issued warnings that United States could be downgraded because of the continued large deficits and increasing debt.[32][33][34][35]
§ According to CBO's 2011 Long-Term Budget Outlook, without major policy changes the large budget deficits and growing debt would continue, which "would reduce national saving, leading to higher interest rates, more borrowing from abroad, and less domestic investment – which in turn would lower income growth in the United States."[23]
§ Through 2010–2011, the European sovereign debt crisis was playing out, and there were concerns that the United States was on the same trajectory.[36]
§ Critics have argued that the debt ceiling crisis is "self-inflicted,"[37] as Treasury bond interest rates were at historical lows and the U.S. had no market restrictions on its ability to obtain additional credit. The debt ceiling has been raised 68 times since 1960 and its increase was considered routine until this debate. The only other country with a debt limit is Denmark, which has set its debt ceiling so high that it is unlikely to be reached. Since Congress has authorized the spending that requires the debt increase, it is ironic that it now refuses to allow the borrowing to fund its own spending authorizations.[37] If raising the limit ceases to be routine, this may create uncertainty for global markets each time a debt ceiling increase is debated.[37] This crisis has also indicated that a party in control of only one chamber of Congress (in this case, Republicans in control of the House of Representatives but not the Senate or the Presidency) can have significant influence if it chooses to block the routine raising of the debt limit.[38]
Debt issuance suspension period
The last time before the current crisis that Congress increased the debt limit was on February 12, 2010. At that time, the ceiling was set to $14.294 trillion.[39][40]
On April 15, 2011, Congress passed the last part of the 2011 United States federal budget, specifying federal government spending for the remainder of the 2011 fiscal year, which ends on September 30, 2011.[citation needed] The spending authorization allowed more spending than expected revenue, which meant there was a budget deficit. Having a budget deficit is very common (of the last 30 fiscal years, only one did not have a budget deficit[citation needed]) and deficits are expected to be accounted for by issuing debt; that is, by borrowing.
For the entire 2011 fiscal year, there was an estimated $3.82 trillion in expenditures, with expected revenues of $2.17 trillion, leaving a deficit of $1.48 trillion.[citation needed] Therefore, soon after the final budget was passed, the debt ceiling was reached. When the debt ceiling is reached, the U.S. Treasury can declare a debt issuance suspension period and utilize methods other than issuing new debt to acquire funds to meet federal obligations.[citation needed]
Several of these methods are described in detail in an Appendix attached to Treasury Secretary Timothy Geithner's April 4, 2011 letter to Congress.[41] These "extraordinary measures" were implemented on May 16, 2011 (as the current debt ceiling was exceeded) when, in a letter to Congress, Geithner declared a "debt issuance suspension period", which provides the Secretary authority to sell assets from the Civil Service Retirement and Disability Fund and the G Fund of the Thrift Savings Plan. According to this letter, this period could "last until August 2, 2011, when the Department of the Treasury projects that the borrowing authority of the United States will be exhausted".[42] These methods have been used in several previous episodes in which federal debt neared its statutory limit.[43]
Alternate views of the deadline
According to the Treasury Department, the deadline to increase the debt ceiling was August 2, 2011, when the U.S. government would run out of cash to pay all its bills.[44] According to Barclays Capital, the Treasury would run out of cash around August 10, when $8.5 billion in Social Security payments were due. According to Wall Street analysts, the U.S. Treasury would not be able borrow from the capital marketsafter August 2, but still would have enough incoming cash to meet its obligations until August 15. Analysts also predicted that the U.S. Treasury would be able to roll over the $90 billion in U.S. debt that matured on August 4 and gain additional time to avert the crisis.[45]
Implications of not raising the debt ceiling
After the United States Treasury exhausts alternate methods of funding (projected on August 2, 2011), the Treasury will have to choose which obligations to pay and which obligations not to pay with the income from tax revenues and other sources.[21] As an example, satisfying existing interest payments to bondholders, Medicare payments, Social Security payments, unemployment insurance and defense contractors would leave no remaining funds to pay active duty military, federal workers, taxpayers due refunds and many other obligations generally considered essential.[7]
Experts are divided on just how bad the effects of not raising the debt ceiling for a short period would be on the economy. While some leading economists, including Republican adviser Douglas Holtz-Eakin, have suggested even a brief failure to meet US obligations could have devastating long-term consequences, others have argued that the market would write it off as a Congressional temper tantrum and return to normal once the immediate crisis was resolved.[46] The worst outcome is if the U.S. fails to pay interest on the national debt to bondholders or, in other words, it defaults on its sovereign debt.[47] Former Treasury Secretary Lawrence Summers warned of serious consequences of a default in July 2011, including: (a) higher borrowing costs for the U.S. government (as much as 1 percent or $150 billion/year in additional interest costs); and (b) the equivalent of bank runs on the money and other financial markets, potentially as severe as those of September 2008.[48]
In January 2011, Treasury Secretary Timothy Geithner warned that "failure to raise the limit would precipitate a default by the United States. Default would effectively impose a significant and long-lasting tax on all Americans and all American businesses and could lead to the loss of millions of American jobs. Even a very short-term or limited default would have catastrophic economic consequences that would last for decades."[49]
Senators Pat Toomey and Jim DeMint expressed deep concern that administration officials were stating or implying that failure to raise the nation's debt limit would constitute a default on US debt and precipitate a financial crisis:[50] "We believe it is irresponsible and harmful for you to sow the seeds of doubt in the market regarding the full faith and credit of the United States and ask that you set the record straight – that you will use all available Treasury funds necessary to prevent default while Congress addresses the looming debt crisis."
Geithner responded that prioritizing debt would require "cutting roughly 40 percent of all government payments", which could only be achieved by "selectively defaulting on obligations previously approved by Congress". He argues that this would harm the reputation of the United States so severely that there is "no guarantee that investors would continue to re-invest in new Treasury securities", forcing the government to repay the principal on existing debt as it matures, which it would be unable to do under any conceivable circumstances. He concluded: "There is no alternative to enactment of a timely increase in the debt limit."[52]On January 25, 2011, Senator Toomey introduced The Full Faith And Credit Act bill [S.163[53]] that would require the Treasury to prioritize payments to service the national debt over other obligations.
Even if the Treasury were to prioritize payments on the debt above other spending and avoid formal default on its bonds, failure to raise the debt ceiling would force the government to reduce its spending by as much as 10 percent of GDP overnight, leading to a corresponding fall in aggregate demand. Such a significant shock, if sustained, is thought to be able to reverse the recovery and send the country into a recession
Proposed resolutions
Congress considered whether and by how much to extend the debt ceiling (or eliminate it), and what long-term policy changes (if any) should be made concurrently.[57]
The Republican position on raising the debt ceiling:
§ Dollar-for-dollar deal – raise the debt ceiling to match corresponding spending cuts[58]
§ More of the budget cuts in the first two years[58]
§ Spending caps[58]
§ Balanced Budget Amendment – to pass Congress and be sent to states for ratification[59][60]
§ No tax increases – tax reform could be considered[61]
(One representative, Ron Paul, proposed transferring $1.6 trillion of federal reserve assets to the government and destroying those bonds, thereby reducing the United States public debt by the same amount.[62])
The Democratic position on raising the debt ceiling:
§ Initially wanted a "clean" increase or unconditional raise to the debt ceiling with no spending cuts attached, as has historically been the norm for Congressional votes on the debt ceiling.[63][64]
§ Tax increase on some to reduce deficits[65]
§ Large debt limit increase to support borrowing into 2013[66]
§ Opposed to any major cuts to Social Security, Medicare, or Medicaid[67][68]
(Some Democratic lawmakers[69][70][71] suggested that the President could declare that the debt ceiling violates the US Constitution and issue an Executive Order to direct the Treasury to issue more debt.[72])
The United States House of Representatives originally refused to raise the debt ceiling without deficit reduction, voting down a 'clean' bill to increase the debt ceiling without conditions. The May 31 vote was 318 to 97, with all 236 Republicans and 82 Democrats voting to defeat the bill.[73] The Republicans largely believed a deficit reduction deal should be based solely on spending cuts, including cuts to entitlements, without any tax increases, to reduce or solve the long-term issue of debt.[74] Obama and the Democrats in the US Congress wanted an increase in the debt ceiling to solve the short-term borrowing problem, and in exchange supported a decrease in the budget deficit to be funded by a combination of spending cuts and revenue increases.[75] Some prominent liberal economists, such as Paul Krugman, Larry Summers, andBrad DeLong, and prominent investors such as Bill Gross, went even further, and argued that not only should the debt ceiling be raised, but federal spending (and, therefore, the deficit) should be increased, which would stimulate the economy, reduce unemployment, and ultimately reduce the deficit in the medium to long term.[76][77]
Some Tea Party Caucus and other Republicans, however, (including, but not limited to, Senators Jim DeMint, Rand Paul, and Mike Lee, and Representatives Michele Bachmann, Ron Paul, and Allen West) expressed skepticism about raising the debt ceiling (with some suggesting the consequences of default are exaggerated), arguing that the debt ceiling should not be raised and "instead the federal debt [should] be 'capped' at the current limit,"[78] "although that would oblige the government to cut spending by almost half overnight."[79]
Jack Balkin, the Knight Professor of Constitutional Law and the First Amendment at Yale Law School, suggested two other ways to solve the debt ceiling crisis: he pointed out that the U.S. Treasury has the power to issue platinum coins in any denomination, so it could solve the debt ceiling crisis by simply issuing two platinum coins in denominations of $1 trillion each, depositing them into its account in the Federal Reserve, and writing checks on the proceeds. Another way to solve the debt ceiling crisis, Balkin suggested, would be for the federal government to sell the Federal Reserve an option to purchase government property for $2 trillion. The Fed would then credit the proceeds to the government's checking account. Once Congress lifts the debt ceiling, the president could buy back the option for a dollar, or the option could simply expire in 90 days.[80]
In a report issued by the credit rating agency Moody's, analyst Steven Hess suggested that the government should consider getting rid of the limit altogether, because the difficulty inherent in reaching an agreement to raise the debt ceiling "creates a high level of uncertainty" and an increased risk of default. As reported by The Washington Post, "without a limit dependent on congressional approval, the report said, the agency would worry less about the government's ability to meet its debt obligations."[81] Other public figures, including Democratic ex-President Bill Clinton and Republican ex-CBO director Douglas Holtz-Eakin, have also suggested eliminating the debt ceiling.[82]
Possible methods of bypassing the debt ceiling
Fourteenth Amendment
During the debate, some scholars, Democratic lawmakers,[69][70][71] and Treasury Secretary Tim Geithner[83] suggested that the President could declare that the debt ceiling violates the United States Constitutionand issue an Executive Order to direct the Treasury to issue more debt.[72] They point to Section 4 of the Fourteenth Amendment to the U.S. Constitution, passed in the context of the Civil War Reconstruction, that states that the validity of the public debt shall not be questioned. Others rebutted this argument by pointing to Section 8 of Article 1 and Section 5 of Fourteenth Amendment which state that Congress has the power of the purse and the authority to enforce the Fourteenth Amendment.[84]
Article I, Section 8. The Congress shall have power...To borrow Money on the credit of the United States;
Amendment XIV, Section 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.
Amendment XIV, Section 5. The Congress shall have power to enforce, by appropriate legislation, the provisions of this article.
Arguments:
§ Jack Balkin, looking into the Legislative History of the Fourteenth Amendment, argues that Section 4 was adopted precisely to guard against politically-determined default. Referencing the sponsor of the provision, Senator Benjamin Wade, Balkin argues that "the central rationale for Section Four... was to remove threats of default on federal debts from partisan struggle." Balkin quotes Wade: "every man who has property in the public funds will feel safer when he sees that the national debt is withdrawn from the power of a Congress to repudiate it and placed under the guardianship of the Constitution than he would feel if it were left at loose ends and subject to the varying majorities which may arise in Congress." According to Balkin, this reveals "an important structural principle. The threat of defaulting on government obligations is a powerful weapon, especially in a complex, interconnected world economy. Devoted partisans can use it to disrupt government, to roil ordinary politics, to undermine policies they do not like, even to seek political revenge. Section Four was placed in the Constitution to remove this weapon from ordinary politics."[85]
§ Bruce Bartlett, a former adviser to President Ronald Reagan and columnist for The Fiscal Times, argues that Section 4 renders the debt ceiling unconstitutional, and that the President should disregard the debt limit.[86]
§ In July 2011, The Nation editor Katrina vanden Heuvel argued that the President could use the public debt section of the Fourteenth Amendment to force the Treasury to continue paying its debts if an agreement to raise the debt ceiling is not reached.[87]
§ Laurence Tribe, professor of Constitutional Law at Harvard Law School, has called the argument that the public debt clause can nullify the debt ceiling "false hope" and has noted that nothing in the Constitution enabled the President to "usurp legislative power" with regards to the debt. Tribe also notes that since Congress has means other than borrowing to pay the federal debt (including raising taxes, coining money, and selling federal assets), the argument that the President could seize the power to borrow could be extended to give the President the ability to seize those powers as well.[88]
§ Garrett Epps counter-argued that the President would not be usurping Congressional power by invoking Section 4 to declare the debt ceiling unconstitutional, because the debt ceiling exceeds Congressional authority: calling it legislative "double-counting," as paraphrased in The New Republic, "because Congress already appropriated the funds in question, it is the executive branch's duty to enact those appropriations."[89] In other words, given Congress has appropriated money via federal programs, the Executive is obligated to enact and, therefore, fund them; the debt ceiling's limit on debt prevents the executive from carrying out those instructions given by Congress, on the constitutional authority to set appropriations, and is therefore unconstitutional.
§ Former President Bill Clinton endorsed this counter-argument, saying he would eliminate the debt ceiling using the 14th amendment, calling it "crazy" that Congress is allowed to first appropriate funds and then gets a second vote on whether to pay for them.[90]
§ Matthew Zeitlin added to the counter-argument that, were Section 4 invoked, members of Congress would not have standing to sue the President for allegedly usurping congressional authority, even if they were willing to do so; and those likely to have standing would be people "designed to elicit zero public sympathy: those who purchased credit default swaps which would pay off in the event of government default."[89] Relatedly, Matthew Steinglass argues that, because it would come down to the Supreme Court, the Court would not vote in the favor of anyone who could and would sue: it would rule the debt ceiling unconstitutional. This is because, for the Court to rule to uphold the debt ceiling, it would, in effect, be voting for the United States to default, with the consequences that would entail; and, Steinglass argues, the Court would not do that.[91]
§ Michael Stern, Senior Counsel to the U.S. House of Representatives from 1996 to 2004, stated that Garrett Epps "had adopted an overly broad interpretation of the Public Debt Clause and that this interpretation, even if accepted, could not justify invalidating the debt limit" because "the President's duty to safeguard the national debt no more enables him to assume Congress's power of the purse than it would enable him to assume the judicial power when (in his opinion) the Supreme Court acts in an unconstitutional manner."[92]
§ Rob Natelson, former Constitutional Law Professor at University of Montana, argues that "this is not some issue in the disputed boundaries between legislative and executive power." He continues "That's why the Constitution itself (Article I, Section 8, Clause 2) gives only Congress, not the President, the power "To borrow Money on the credit of the United States." In another argument, Natelson states that Bruce Bartlett "deftly omits a crucial part of the quote from the Fourteenth Amendment. It actually says, 'The validity of the public debt of the United States, AUTHORIZED BY LAW . . . shall not be questioned.' In other words, Congress has to approve the debt for it not to be questioned. And note that this language refers to existing debt, not to creating new debt. He also neglects to mention that Section 5 of the Fourteenth Amendment specifically grants to Congress, not to the President, authority to enforce the amendment."[84]
§ Treasury Secretary Tim Geithner[83] implied that the debt ceiling may violate the Constitution but George Madison, General Counsel to the U.S. Treasury, wrote on July 8, 2011 that "Secretary Geithner has never argued that the 14th Amendment to the U.S. Constitution allows the President to disregard the statutory debt limit" and that "the Constitution explicitly places the borrowing authority with Congress." He additionally affirmed that "Secretary Geithner has always viewed the debt limit as a binding legal constraint that can only be raised by Congress."[93]
Minting coins
U.S. law does not place a limit on the denomination of minted coins, and specifically mentions that the Mint can create platinum coins of arbitrary value under the discretion of the Secretary of the Treasury.[94] Yale law professor Jack Balkin mentioned seigniorage as a solution,[95] although there had been speculation about the option online since January 2011.[96] Hence, it was suggested that (for instance) a US$5 trillion coin could be minted and deposited with the Federal Reserve and used to buy back debt, thus making funds available.[97]
Monetizing gold
A similar crisis was faced during the Eisenhower Administration in 1953. The debt ceiling was not raised until the spring of 1954.[98] To accommodate the gap, the Eisenhower administration increased its gold certificate deposits at the Federal Reserve, which it could do because the market price of gold had increased. According to experts,[99] the Secretary of the Treasury is still authorized to monetize 8,000 tons of gold, valued under the old law at approximately $42 per ounce, but with a market value worth over $1,600 per ounce.[100]
Agreement
Main article: Budget Control Act of 2011
On July 31, 2011, President Obama announced that the leaders of both parties in both chambers had reached an agreement that would reduce the deficit and avoid default.[101] The same day, Speaker Boehner's office outlined the agreement for House Republicans.[102] The agreement would:
§ Cut spending more than it increases the debt limit. In the first installment ("tranche"), $917 billion would be cut over 10 years in exchange for increasing the debt limit by $900 billion.
§ The agreement establishes a joint committee of Congress that would produce debt reduction legislation by November 23, 2011 that would be immune from amendments or filibuster. The goal of the legislation is to cut at least $1.5 trillion over the coming 10 years and be passed by December 23, 2011. The committee would have 12 members, 6 from each party.
§ Projected revenue from the committee's legislation must not exceed the revenue baseline produced by current law.[citation needed]
§ The agreement specifies an incentive for Congress to act. If Congress fails to produce a deficit reduction bill with at least $1.2 trillion in cuts, then Congress can grant a $1.2 trillion increase in the debt ceiling but this would trigger across the board cuts ("sequestration") of spending equally split between defense and non defense programs. The across the board cuts would apply to mandatory and discretionary spending in the years 2013 to 2021 and be in an amount equal to the difference between $1.2 trillion and the amount of deficit reduction enacted from the joint committee. The sequestration mechanism is the same as theBalanced Budget Act of 1997. There are exemptions—across the board cuts would apply to Medicare, but not to Social Security, Medicaid, civil and military employee pay, or veterans.
§ Congress must vote on a Balanced Budget Amendment between October 1, 2011 and the end of the year.
§ The debt ceiling may be increased an additional $1.5 trillion if either one of the following two conditions are met:
§ A balanced budget amendment is sent to the states
§ The joint committee cuts spending by a greater amount than the requested debt ceiling increase.
Most of the $900 billion in cuts occur in future years and so will not remove significant capital from the economy in the current and following year.[citation needed] Regarding the across the board cuts, these could not take place until 2013 and so if triggered, a new Congress could vote to eliminate or deepen all or part of them. Boehner was reported to be particularly concerned that any defense cuts could not go into effect until after 2013. The agreement contains the McConnell mechanism for the specified debt ceiling increases. The President may make the specified increases, but to stop them the Congress must pass a bill to disapprove of them by the two thirds majority needed to override a veto.
The agreement, entitled the Budget Control Act of 2011 passed the House on August 1, 2011 by a vote of 269–161; 174 Republicans and 95 Democrats voted for it, while 66 Republicans and 95 Democrats voted against it. The Senate passed the agreement on August 2, 2011 by a vote of 74–26; seven Democrats and 19 Republicans voted against it. Obama signed the bill shortly after it was passed by the Senate.
Reaction
The national debt rose $238 billion, the largest one day increase in the history of the United States,without the corresponding sale or issuance of Treasury bonds.[108] US debt surpassed 100 percent of gross domestic product for the first time since World War II.[109] According to the International Monetary Fund, US joined a group of countries whose public debt exceeds GDP, including Japan (229 percent), Greece (152 percent), Jamaica (137 percent), Lebanon (134 percent), Italy (120 percent), Ireland (114 percent) and Iceland (103 percent).[110]
The US stock markets NASDAQ, S&P 100, and ASX lost up to 4% in value, the largest drop after the July 2009 GFC. The commodities market also took losses with average spot Crude Oil market prices falling below $US86 a barrel.[111] The price of gold fell as deepening losses on Wall Street prompted investors to sell.[112]
The long-term credit rating of the United States government was downgraded for the first time in history from AAA to AA+. In a joint press release, the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency, federally regulated institutions were told that for risk-based capital purposes, the debt of the United States was still considered to be risk free.[113]
[edit]International reaction
In India the BSE SENSEX stock market fell over 700 points.
Congressional reaction
A number of Congressmen from both parties describe the actions of some Republicans amounted to hostage taking.
§ Senator Al Franken explained "I think it’s unconscionable. This is really playing with the full faith and credit of the United States government. We don’t know for sure what the effect would be, but we may be risking a worldwide depression by doing this. Basically, the world economy is based on the dollar and based on the Treasury. And for us to allow the default on treasuries would be, I think, an absolute disaster. This kind of hostage-taking to me is unconscionable."
§ Senator John Kerry declared: "Everybody’s talked it, yes the Congress was taken hostage, the country, the economy was taken hostage. You had people there who were literally ready to cut the baby in half."
§ Congresswoman Janice Hahn said "...We lost the debate when we began negotiating with the Tea Party. I mean, we have raised the debt limit in this country numerous times – it was 17 times under President Reagan, I think. So it happens all the time – this was the first time in our history that they decided to use this act to hold us hostage, to hold our economy hostage. And they were very willing to take this country over the cliff and blow up our economy if they didn’t get their way.”
§ Senator Tom Harkin explained "Congressional Republicans are holding our nation hostage, threatening to default on our national debt and plunge America into an abyss."
§ Congressman Keith Ellison observed "[members of the Republican party aligned with the tea party movement are holding] "our economy hostage."
§ Senate Minority Leader Mitch McConnell, on the GOP “I think some of our members may have thought the default issue was a hostage you might take a chance at shooting. Most of us didn’t think that. What we did learn is this — it’s a hostage that’s worth ransoming. And it focuses the Congress on something that must be done.”
Timeline
§ December 16, 2009. The debt ceiling is exceeded. To avoid default, the Treasury Department uses "extraordinary accounting tools" to enable the Treasury to make an additional $150 billion available to meet the necessary federal obligations.[114]
§ February 12, 2010. The most recent increase in the debt ceiling was signed into law by President Obama, after being passed by the Democratic 111th United States Congress. It increased the debt ceiling by $1.9 trillion from $12.394 trillion to $14.294 trillion.[39][115]
§ February 18, 2010. Obama issues an Executive Order to establish the National Commission on Fiscal Responsibility and Reform, also known as the Bowles-Simpson Commission. The mission of the Commission was to propose recommendations designed to balance the budget, excluding interest payments on the debt, by 2015. It was tasked to issue a report with a set of recommendations by December 1, 2010.[116]
§ November 2, 2010. United States midterm elections: The Republican Party gained 63 seats in the U.S. House of Representatives, recapturing the majority by 242–193 in the 112th Congress.[117] Major planksfor the House Republicans during the election campaign were cutting federal spending[118] and stopping any tax increases.[119]
§ December 1, 2010. The Bowles-Simpson Commission on Fiscal Responsibility and Reform issues its report but the recommendations fail to win support of at least 14 of the 18 members necessary to adopt it formally.[120][121] The recommendations were never adopted by Congress nor President Obama.
§ January 6, April 4 and May 2, 2011. Secretary of the Treasury Timothy Geithner sends three letters requesting an increase in the debt ceiling.[122][123][124]
§ January 25, 2011. Senator Pat Toomey introduces the Full Faith And Credit Act bill[54] [S.163[53]] that would require the Treasury to prioritize payments to service the national debt over other obligations. The bill is never debated.
§ January 28, 2011. Moody's Investors Service says it may place a "negative" outlook on the AAA rating of U.S. debt sooner than anticipated as the country's budget deficit widens.[125]
§ February 14, 2011. Obama releases his budget proposal for fiscal year 2012.[126] Republicans criticize the budget for doing too little to rein in the burgeoning US deficit.[127] The CBO analysis released in April 2011 estimated that the budget would increase total deficits over 10 years by $2.7 trillion: from $6.7 trillion of the March 2011 baseline to $9.4 trillion with the proposed budget.[128] The Senate rejects the budget proposal on May 25, 2011 (see below).
§ April 14, 2011. Both the House of Representatives and the Senate voted in favor of the 2011 US federal budget, 260–167 and 81–19 respectively. This budget projected the 2011 deficit to be $1.645 trillion, and therefore ensured that the debt ceiling would be hit during this fiscal year.
§ April 15, 2011. On a party-line vote 235–193, the House of Representatives passed the Republican 2012 budget proposal aimed to reduce total spending by $5.8 trillion and reduce total deficits by $4.4 trillion over 10 years compared to the current-policy baseline.[129] It included reform to Medicare and Medicaid entitlement programs which the Democrats criticized as an attempt to leave seniors and poor holding the bag on health care costs. The criticism resonated with the many in the public who voiced opposition to the proposed changes.[130] The Senate rejects the budget proposal on May 25, 2011 (see below).
§ April 18, 2011. Standard & Poor's Ratings Services revised its outlook on US to negative due to recent and expected further deterioration in the U.S. fiscal profile, and of the ability and willingness of the U.S. to soon reverse this trend. With the negative outlook, S&P believes there is a likelihood of at least one-in-three of a downward rating adjustment within two years.[131]
§ May 16, 2011. The debt ceiling is reached. Treasury Secretary Timothy Geithner issues a debt issuance suspension period, directing the Treasury to utilize "extraordinary measures" to fund federal obligations.[132]
§ May 18, 2011. Bipartisan deficit-reduction talks among the "Gang of Six" high-profile Senators are suspended when Republican Tom Coburn drops out.[133]
§ May 24, 2011. Vice President Joe Biden and four Democratic lawmakers begin meeting with the Republican House Majority Leader Eric Cantor and the Republican Senate Minority Whip Jon Kyl, in an effort to continue the talks. Cantor says that these talks would lay the groundwork for further discussions between President Obama, Republican Speaker of the House John Boehner and other leaders of Congress.[134]
§ May 25, 2011. The Senate rejects both the Republican House budget proposal by a vote of 57–40 and the Obama budget proposal by a vote of 97–0.[135]
§ May 31, 2011. The House votes on a bill to raise the debt ceiling without any spending cuts tied to the increase. President Obama asked Congress to raise the debt ceiling in a 'clean' vote that included no other conditions. The bill, which would have raised the debt ceiling by $2.4 trillion, failed by a vote of 97–318. Democrats accused Republicans of playing politics by holding a vote they knew would fail.[136]
§ June 23, 2011. Biden's negotiations on the debt ceiling are cut off when both Eric Cantor and Jon Kyl walk out over disagreements on taxes.[137]
§ July 19, 2011. The Republican Majority in the House bring the Cut, Cap and Balance Act (H.R.2560),[138] their proposed solution to the crisis, to a vote. They pass the bill by a vote of 234–190, split closely along party lines: 229 Republicans and 5 Democrats 'for', 181 Democrats and 9 Republicans 'against'; it is sent to the Senate for consideration. The Bill authorized that the debt ceiling be raised by $2.4 trillion after a Balanced Budget Amendment was passed by Congress. Since Constitutional amendments require a two-thirds majority vote in both chambers of Congress to pass, a vote for a Balanced Budget Amendment would require more support than the Cut, Cap and Balance Act bill achieved in the House vote.[139]
§ July 22, 2011. The Senate votes along party lines to table the Cut, Cap and Balance Act; 51 Democrats voting to table it and 46 Republicans voting to bring it to a debate.[140] Senate Majority Leader Reid called the Act "one of the worst pieces of legislation to ever be placed on the floor of the United States Senate." Even had it passed Congress, Obama had promised to veto the bill.[141]
§ July 25, 2011. Republicans and Democrats outlined separate deficit-reduction proposals.[142]
§ July 25, 2011. Obama and Speaker of the House John Boehner addressed the nation separately over network television with regards to the debt ceiling.[143][144]
§ July 25, 2011. The bond market is shaken by a single $850 million futures trade betting on US default.[145]
§ July 29, 2011. The Budget Control Act of 2011 S. 627 ,[146] a Republican bill that immediately raises the debt ceiling by $900 billion and reduces spending by $917 billion, passes in the House on vote 218–210. No Democrats voted for it and it also drew 'no' votes from 22 Republicans who deemed it insufficiently tough on spending cuts.[147] It allows the President to request a second increase in the debt ceiling of up to $1.6 trillion upon passage of the balanced-budget amendment and a separate $1.8 trillion deficit reduction package, to be written by a new "joint committee of Congress."[148] Upon introduction into the Senate in the evening, the bill was immediately tabled on a 59–41 vote including some Republican votes.[149]
§ July 30, 2011. The House of Representatives voted 173–246 to defeat Senate Majority Leader Harry Reid's $2.4 trillion plan to reduce the deficit and raise the debt ceiling.[150]
§ July 31, 2011. President Barack Obama announces that leaders of both parties have reached an agreement to lift the debt ceiling and reduce the federal deficit, and separately, House Speaker John Boehner told Republicans that they have reached the framework for an agreement.[151] Boehner reveals details of the agreement in a presentation to the House Republicans.[152]
§ August 1, 2011. The House passes a bipartisan bill by a vote of 269–161. 174 Republicans and 95 Democrats voted 'yes'; 66 Republicans and 95 Democrats voted 'no'.[153]
§ August 2, 2011. The Senate passes the bill by a vote of 74-26. 28 Republicans, 45 Democrats, and 1 independent voted 'yes'; 19 Republicans, 6 Democrats, and 1 independent voted 'no'.[154] President Obama signed the debt ceiling bill the same day, thus ending fears of a default. Obama also declared that the bill is an "important first step to ensuring that as a nation we live within our means."[155]
§ August 2, 2011. Date estimated by the Department of the Treasury that the borrowing authority of the U.S. would be exhausted.[132]
Projected:
§ August 15, 2011. $29 billion of debt interest becomes due. If this is not paid, the United States technically would be in sovereign default.
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