The Politics of the Debt Ceiling

In recent weeks, the United States of America came closer than it ever had to defaulting on its debt. Following a last minute deal between US lawmakers that saw the debt ceiling raised in return for $1.5 trillion in spending cuts, Ben Uffindell examines just how the world's most powerful economy came to the edge of disaster.

On August 2nd 2011, the President of the United States, Barack Obama, signed into law a piece of legislation that would raise the federal debt ceiling by $2.4 trillion, allowing the United States federal government to further borrow and incur that much more in debt. The raising of the debt ceiling is fairly routine in Washington, D.C. Indeed, prior to August 2nd, it had been raised 74 times, and had never faced any meaningful opposition. But when Obama signed into law this latest rise in the debt ceiling, he was doing so at the eleventh hour, less than one day from the deadline upon which the federal government would have run out of money to continue fulfilling its obligations. At that point, there would not have been sufficient funds to make payments to Social Security, Medicare and Medicaid beneficiaries. There would not have been the funds to continue issuing the paycheques of those in the military and the civil service, and, perhaps most worryingly of all, the United States may not have been able to, in the longer term, pay the interest on its existing debt. This would mean a national default, one that would have threatened to collapse the economy of the United States itself.

In the face of such daunting consequences, why, then, did it take the White House and Congress so long to reach a deal with regards to something that had been done, without issue, so many times before? For many around the globe, it represented a stunning failure on the part of American democracy, a puzzling display of legislative gridlock that made the United States seem all-too-willing to run itself over a cliff. Above all else, however, it was a resounding signal that the political landscape in Washington had changed. Dramatically.

The Debt Debate & the Rise of the Tea Party

On November 4th 2008, Illinois Senator Barack Obama was elected to the office of the President of the United States. To many liberal Democrats, activists, and politicians, it represented a transformational moment in American history; a shifting of the political paradigm from right to left. The administration of George W. Bush, as they saw it, had, for its many failings, brought an end to the political dominance that the American Right had enjoyed since Richard Nixon. Now was a time to return to the progressive dominance of Franklin D. Roosevelt and Lyndon Johnson. This may have been a romantic notion, but it was a grave miscalculation.

Many had anticipated that America was at a far more transformational moment than it actually was. The enthusiasm of the American Left had a strong influence on the perceptions of the American Middle. In this enthusiasm was bred a naïve belief that things would simply get better from then onward; that the failings of the Bush Administration were the product of a single president, rather than a product of institutional deficiencies that could not be easily healed. When the economy did not magically rebound, disillusionment set in. Independent voters lost faith in their new president much more quickly than they had their previous one. "Hope" and "Change" looked nothing of the sort, and "Yes we can" acquired a cautionary asterisk.

When independent voters are indifferent about a president, the opposition tends to be sour with that president. But when independent voters become sour, the opposition becomes livid, and as early as late 2009, livid it was. This anger with the Obama Administration would soon give rise to a completely new grassroots movement: The Tea Party. The Tea Party possessed no central organization, and while it was encouraged – both morally and financially – by several Republican backers, it was, for the most part, a completely independent political movement, organised from the ground up. The Tea Party fashioned itself as libertarian in perspective, and concerned itself primarily with one issue: the U.S. national debt.

Under President Bill Clinton, the United States Federal Government spent $500 million a day. Under President George W. Bush, it spent $1.6 billion a day; and under President Obama, the United States Federal Government spends an astonishing $4.1 billion a day. This kind of rapidly escalating spending is not without consequence; today the U.S. national debt sits at 96% of GDP, a figure which could prove extremely damaging to the country's long-term economic prospects. It is figures such as these that the Tea Party movement found – and continue to find – so deplorable.

The Tea Party's libertarian philosophy made it a natural enemy of Obama's 2010 attempt to provide all Americans with some form of health insurance. Health care reform was a bitter battlefield, one that thrust the Tea Party into the national spotlight, and took it from being a haphazard grassroots movement to a very real and extremely potent force in local, state, and federal politics. The Tea Party brought new life and energy to a Republican Party that desperately needed it, and propelled them to victory in the 2010 mid-term elections. It was then that Republicans seized control of the House of Representatives, which they had previously lost to the Democrats in the 2006 mid-terms. This was a stinging blow for President Obama.

A large number of congressmen and women who provided Republicans with their majority in the House were elected with the aid and support of the Tea Party movement. These hard-right, fiscal conservatives were almost exclusively newcomers to Congress, and came to be known as Tea Party Republicans. Their presence was a sharp departure from the Bush-era Republican Party of the 2000s. While George W. Bush was excoriated by the left in America, it would pay to remember that, at least domestically, he was very centrist in his politics; championing his own brand of "compassionate conservatism". Texas governor Rick Perry, Bush's successor in that office, has long asserted that George W. Bush "never was a fiscal conservative". If we were comparing Bush to Tea Party Republicans, he'd be quite right.

It was this political environment that would set the stage for the 2011 debt ceiling debacle.

The Obama-Boehner Negotiations

By the time July 2011 rolled around, the United States was already well overdue for an increase of its national debt ceiling. Without such a rise, the country would be unable to pay the bills it had already racked up without defaulting on several of its key obligations. The final deadline for getting the debt ceiling raised had been identified by the Treasury Department as August 2nd. Prior the election of a Republican House of Representatives in November 2010, President Obama had expected Congress to grant him a clean raise of the debt ceiling with no conditions attached. This, however, did not sit well with newly elected Tea Party Republicans, who were restless and eager to do something practical about the ballooning national debt. As they saw it, to give the government a blank cheque to incur more debt – without any commitment to solve the long-term issue of enormous fiscal deficits – was unconscionable, a corrupt practice of the "old Washington".

As a result of these attitudes – which now held a large amount of influence in the wider Republican Party – the White House and prominent Democrats began to seriously fear that a bill to raise the debt ceiling could, plausibly, be defeated in Congress. With the August deadline looming, President Obama set out to bridge the divide between himself and the Republican House by sitting down for extensive negotiations with Republican Speaker of the House John Boehner.

Boehner is a Congressman from Ohio. He became Speaker in 2011 after the Tea Party wave swept Republicans back into control of the House. Boehner was not a Tea Party Republican, but the coincidence of their rise and his speakership meant that he did hold at least some obligation toward them. Indeed, Republicans would not control the House of Representatives at all without the Tea Party caucus (a formal group of Republican congressmen and women, launched and chaired by Congresswoman Michele Bachmann, who identify themselves as Tea Party Republicans).

This made matters rather complicated for John Boehner in his negotiations with the White House. Boehner and the Tea Party did, in broad terms, agree upon one thing: that there could be no "clean" raise in the debt ceiling; significant cuts and serious attempts at deficit-reduction had to be attached. Such a notion could even – and did, in fact – gain bipartisan support from Democratic lawmakers in the House and Senate. The trickier issue was with regards to just how far Tea Party Republicans wanted to go. In order to negotiate a successful deal with the President, Boehner had to extract a bill from Obama that would satisfy at least some members of the Tea Party caucus; otherwise he would have to pass a bill with Democratic votes – a very bad look for a Republican Speaker of the House. This was a hard ask, given that the demands of the Tea Party caucus were extremely substantial, and there even existed some amongst their ranks that opposed raising the debt ceiling – period.

Obama and Boehner negotiated for weeks – oftentimes behind closed doors, sometimes over golf – and, for some time, did appear to be reaching some sort of a workable compromise. But on Friday, July 22nd, talks abruptly broke down. Boehner angrily quit negotiations, walking away from a deal that was very nearly completed. It wasn't immediately clear what went wrong, but the sticking point appeared to be revenue raising; i.e. tax increases or the closing of tax loopholes. President Obama claimed that Boehner and House Republicans were hell-bent on taking a "cuts only" approach, and that Boehner had walked away from talks because he simply wasn't willing to raise taxes on even the wealthiest Americans. Boehner, by contrast, claimed that he had agreed to around $400 billion in increased revenues, but that President Obama had "moved the goalposts" at the last minute.

Now seeing that the negotiations process had broken down, both houses of Congress moved to find their own solution, developing two rival pieces of legislation.

The Boehner Bill

The Boehner Bill was developed by Speaker John Boehner in an attempt to show that he could find an agreeable solution without the aid of the President. The bill promised more than $900 billion in immediate cuts in return for raising the debt ceiling for a period of 6 months, after which more than $1 trillion in cuts would have to be put into effect. If they weren't, the debt ceiling would be raised no further.

The Boehner plan was widely criticized by Democrats and the White House as being nothing more than a "short-term fix". President Obama had previously vowed to veto any bill that did not raise the debt-ceiling into 2013, past the 2012 election. Boehner's bill, argued the White House, would only force a bitter rematch of the debt ceiling debate six months from now, and do little to provide confidence to credit ratings agencies, who were already considering a downgrade of the United States' credit rating. Republicans rubbished these claims, insisting that Obama merely didn't want to deal with the debt during an election year.

The Boehner Bill also didn't win much support amongst the Tea Party caucus, who considered the bill to be too light on spending cuts.

The Reid Bill

The Reid bill was developed by Democratic Senate Majority Leader Harry Reid, who sought to provide a practical alternative to the short-term Boehner plan. The Reid plan contained no new revenues (apparently conceding to Republicans on that point), and vowed to cut a total of $2.2 trillion from the deficit. Perhaps most importantly, the bill would raise the debt ceiling through to 2013, providing President Obama with the long-term increase he had been requesting.

The Reid plan was heavily criticized for not being truly serious about deficit-reduction, instead containing "gimmicky" spending cuts. Most notably, the bill contained $1 trillion in savings from "winding down the wars in Iraq and Afghanistan", spending that would never actually have occurred anyway. Political analyst Charles Krauthammer likened this to making "savings from not invading Normandy a second time".

Obama Addresses the Nation

Monday July 25th: Seeking to exert some influence on the debate going on in Congress, Obama gave a televised address to the entire nation to explain the ongoing debt crisis and how he thought it ought to be resolved. He used this primetime slot to chastise House Republicans for wanting a "cuts only" approach, insisting that an eventual compromise had to acknowledge the importance of raising revenues. The wealthiest Americans, he said, ought to pay their fair share.

Minutes later, John Boehner issued a five minute response, claiming that revenues were not the problem, and that Washington had a serious responsibility to stop what he called a "spending binge". Obama, he said, merely wanted a blank cheque to spend more taxpayers' money.

Gridlock

The Boehner Bill was scheduled to be voted on by the House of Representatives on the night of Thursday July 28th. However, hours before the vote was to take place, Boehner and his team of House Republicans pulled the bill from the House floor, postponing the vote until the next day. It was clear that, having consulted with the Republican caucus, Boehner did not yet have the votes. He spent the next 24 hours searching for amendments to the legislation that would win him enough support to pass it, and after consultation with several members of the Tea Party caucus, he settled on a solution to his problem. Boehner added a clause to his legislation that would set in motion a process by which a Balanced Budget Amendment would be added to the United States constitution; one that would ensure the federal government was legally obliged to move itself, at all times, towards a balanced budget. This won the support of several Tea Party Republicans, and on Friday July 29th, the Boehner Bill passed the House, 218-210. Twenty two Republicans voted against.

After just scraping through the House, the Boehner Bill made its way to the Senate, where Majority Leader Harry Reid immediately called a vote to table the legislation. The vote was successful, effectively killing the Boehner Bill for good. Reid then moved to call a vote on his own piece of legislation, but Republican Minority Leader Mitch McConnell threatened to block the legislation if Reid would not agree to a cloture vote*, rather than a vote by simple majority. This was hardly consequential; even if Reid's bill had passed the Senate, it would have been rejected unanimously by Republicans in the House.

(* Where a simple majority vote requires a piece of legislation gets 51 votes, a cloture vote requires 60 votes. A simple majority vote can be filibustered (held up indefinitely by opposition), but a cloture vote cannot)

The Grand Compromise

On Saturday July 30th, with both pieces of legislation defeated and mere days before a possible government shutdown, John Boehner and Mitch McConnell held a joint press conference, wherein they revealed that, that morning, they had re-engaged in talks with the White House. "I'll concede the point" said McConnell. "We cannot reach a deal without the president. We tried that".

After two days of fresh negotiations, on the night of Sunday July 31st, President Obama and John Boehner jointly announced that they had reached a deal. The deal, titled The Budget Control Act of 2011, put into immediate effect $900 billion in cuts: half from defence, half from entitlement programs. Following this, a joint congressional "super committee" was to be established; one consisting of six Democrats and six Republicans. The committee would have to find an additional $1.5 trillion in cuts, and if it could not, then an automatic $1.2 trillion in cuts would go into effect. In return for this, President Obama would receive a long-term debt ceiling raise past the election and into 2013. Furthermore, the legislation would require there to be a Congressional vote on the adoption of a Balanced Budget Amendment to the constitution. The bill contained no raising of revenues.

On Monday, August 1st, the House passed The Budget Control Act by a margin of 269-161. The Senate later passed the bill 74-26. President Obama signed the bill into law on August 2nd, 2011.

Aftermath

President Obama attempted to paint the debt deal as a product of genuine compromise, while Boehner argued that Republicans had achieved "98%" of what they wanted. The reality, however, was that no one was satisfied with the deal. The president himself acknowledged that the deal was not what he had wanted, and a number of Republicans in the Senate and the House were upset with the sweeping cuts to defense. Democrats, however, found the bill hardest to swallow. House Democrats, particularly, were furious that Obama would accept such sweeping spending cuts without holding firm on his demand to raise revenues. In the House, the Democratic vote was split dead even: 95 in favour, 95 against.

But perhaps the most resounding disapproval of the compromise came less than a week later from international ratings giant Standard & Poors. Citing the unimpressive nature of the legislation, and the worrying brinkmanship that brought it about, S&P made history by being the first ratings agency ever to downgrade the United States' platinum, AAA credit rating. The Obama Administration pushed back furiously, citing a $2 trillion error made by the ratings agency. But it was already too late; the damage had been done, and the following week, the stock markets plunged.

Once again, confidence had been thoroughly eroded in the United States Government.