Before its signing on August 02, 2011, the debt-ceiling deal had been intensely debated in Congress. In fact, even after its passage, neither party was satisfied with its outcome. During the debate, the Republicans; and particularly members of Tea Party members, emerged as fiscal hardliners. In return for their support for the deal, they advocated for greater budget cuts. On the other hand, the left-leaning members of the Democratic Party felt that the cuts would hurt the citizen because the government would have to reduce funding or abandon vital functions. All the same, the government was able to narrowly avoid defaulting on its borrowing. This, in effect, fended off a global economic catastrophe.
A debt ceiling is the amount that the United States’ Congress sanctions the federal government to borrow. The debt ceiling prior the latest increase was approximately $14.3 trillion. Government spending could have reached that figure at around May 16 although the Treasury Secretary, Timothy Geithner, assured that default wouldn’t occur before July 8. To avoid defaulting, the Congress had to sanction an increase in the debt ceiling by at least $1 trillion. The debt owed by the United States government keeps on rising because its spending is not proportional to the earnings. As a matter of fact, statistics shows that for every $100 spent by the federal government, only $60 of these comes from tax collection. The remainder is acquired through borrowing from investors. The current disharmonious scenario has been aggravated primarily by the costly policies of the government over the last decade. Some of these policies include tax cuts, stimulus spending, Medicare benefits, as well as Afghanistan and Iraqi warfare. Additional burden came as a result of the steady rise in the costs of Social Security, Medicare, and Medicaid. To accommodate these extra costs, the government has raised the limit severally; and from 2002, the debt ceiling has been a record seven times.
In addition to defaulting, failure of a debt ceiling rise could have crippled the government, leading to cuts in retirement benefits, military salaries, as well as Medicare and Social Security payments. Furthermore, the country faced a plug into a deep recession; which could have, among other things, caused a surge in borrowing costs and interest rates. The dollar could definitely have plummeted, making the markets spiral into destruction as a result of investors dodging the American stock markets and other businesses. The scenario could simply have been catastrophic.
Although none of representatives would wish to gamble with the lives of Americans, fiscal policies, and especially the process of increasing the borrowing limit has been politicized for quite sometimes. For example, although the main antagonists for the president’s bid this year are Republicans, history shows that, in 2004, Barack Obama as senator opposed President George W. Bush’s appeal for an increase of the debt ceiling to about $8.18 trillion. This year’s debate generated so much attention since the issue of government spending has been a national dialogue recently. The antagonism began at around January 6, when Treasury Secretary Timothy Geithner wrote to Senate Majority Leader Harry Reid, a Democrat from Nevada. Subsequently, the Congressional Research Service prepared a report that elaborated the scourging impact on Americans that would result from failing to raise the borrowing limit. Secretary Geithner insisted to a House Appropriation Committee that the federal government was faced by no other choice than the default, which would in effect hurt the American people. Nevertheless, some members felt that the debt limit was way beyond the reasonable levels and raising it further would only spell doom.
The striking showdown was between the government and the fresh members of The Tea Party. Prior the debate, the impending disagreement was hinted by a column on Dana Milbank regarding the antics that The Tea Party members braced to employ during the negotiations. They seemed ready to accept any detrimental outcome instead of voting for a debt ceiling rise. Everyone knew that faith and credit worthiness of the United States would be destroyed, and damage to the global economy would be blamed on the American people. Although alarms on inevitable wrecking of the economy as a result of unceasing debt-ceiling antagonism were sounded from different quotas, the drama was seen to have completely engulfed the Capitol making the nation edge closer to the risk of default. What is more, the House Minority Leader Nancy Pelosi, a member of the Democratic Party from California, expressed doubts on several occasions that the House speaker John Boehner would secure enough votes to facilitate a rise in borrowing limit. Not every member seemed to have learnt from the brinkmanship that narrowly avoided a disastrous government shutdown, and this scenario meant that the debate over debt ceiling rise would still be as intense.
The contention arose because, as the republicans campaigned for cuts instead of raising the debt ceiling; the Democrats were advocating for a rise in borrowing limits with a minimum cuts in spending. While some Democrats agreed that budget cuts were necessary, several of their colleagues argued that this was only achievable in the long run. To strike a balanced budget through cuts, the government could have been forced to slash 40% of its spending almost instantly which of course was impossible under any circumstance. In fact, Secretary Geithner pointed out that the Congress needed to cut this year’s spending by $700 to avoid a debt ceiling rise.
Though America was to hit its sanctioned borrowing limit on May 16, Secretary Geithner worked so hard to realize extra revenue and in effect pushed the deadline to August 2. Unfortunately, the bond/credit rating agencies began warning that America risked being downgraded from its AAA credit rating in June (Rosemary, 2011). This meant losing all the advantages that come with such rating, majorly the investor confidence. Even so, some representatives claimed that defaulting on a short-term wouldn’t be disastrous, and others believed that Secretary Geithner’s August 2 deadline deceptive and only intended to intimidate the members of the House.
In a June 30 press conference held in White House, President Obama asserted that the consequences of default would be dire. This, among other factors, stimulated Harry Reid to cancel the senate’s recess on July 4. On July 11, Secretary Geithner warned that even the Congress would crash after August 2 if the representatives fail to act swiftly. When the highly popularized Gang of Six Senators released their plan of slashing the debt, many representatives got amused; and even the president backed it up. Regrettably, the grand bargain negotiation between the President and the House Speaker broke down in a dramatic fashion resulting into a situation that placed the nation between downgrade and default. Either one of the two would have caused unprecedented damage. Luckily, when the Bipartisan Policy Center’s report elaborated the rewards of an agreement, the members saw the need of making concessions.
Soon after the members of both parties in the House of Representatives got down to business, it was evident that the Republican Party members wanted the President to promise big cuts in spending. In fact, House Speaker John Boehner pointed out that his party won’t be supporting an increase unless the President makes ‘big promises’. This forced the President to release a couple of press statements assuring the nation that there will be targeted cuts in spending with the aim of reducing the budget deficit. However, his proposal failed to satisfy the Republican representatives on several occasions, resulting into confrontations that put the stability of the American economy on a balance.
Eventually, default on borrowing was averted by a 269-161 vote in the House of Representatives and 74-26 in the senate subsequently allowing for lifting on the borrowing limit. Despite all the efforts, the Standard & Poor’s (S&P) rating agency downgraded the America’s credit rating from its top-tier AAA, which had been held for 70 years, to a lower AA+ rating. This is expected to cause a rise in credit-card and mortgage interest rates, as well as gas prices, and in effect affect every American. S&P thought that the government lacked the capacity to stabilize its midterm borrowing dynamics, and thus warranting the downgrade. They further indicated that the nation may suffer another downgrade in 12 to 18 months since its credit rating outlook seemed negative. These moves will have wider implications to the dollar as a reserve currency, because they may necessitate adjustments in the global economic systems to accommodate uncertainties of the drop in rating. To alleviate such downgrades, the President has signed the Budget Control Act of 2011 which is meant to minimize the budget deficit by about $2.1 trillion in 10 years. However, this fell short of the figure proposed by S&P, i.e. $4 trillion, for effective fixation of the nation’s finances.