Yesterday President Obama and Republican leadership came to an agreement on the debt ceiling deal. So everything is fixed, right? Not quite. Both the House and the Senate have to vote on the deal. Either party could still force us to default by voting it down and judging by some of the terms of the deal either party might do just that.
There is a saying that if neither party is happy with the deal; then it must be a fair deal. Unfortunately that is not the case here. True neither party is happy but for very different reasons.
What exactly is contained in the bill and who won?
Here are the major points according to the White House.
Mechanics of the Debt Deal
- Immediately enacted 10-year discretionary spending caps generating nearly $1 trillion in deficit reduction; balanced between defense and non-defense spending. (This would be considered a Republic win)
- President authorized to increase the debt limit by at least $2.1 trillion, eliminating the need for further increases until 2013. (Everyone wins and we avoid an economic apocalypse, yay us.) This also leans toward a Democratic win as the debt ceiling won’t come up again until 2013, after the elections. The Republicans will have to find something else to hold hostage.)
- Bipartisan committee process tasked with identifying an additional $1.5 trillion in deficit reduction, including from entitlement and tax reform. Committee is required to report legislation by November 23, 2011, which receives fast-track protections. Congress is required to vote on Committee recommendations by December 23, 2011. (This is bad for both parties and all Americans but the Tea Party would consider this a win) Basically, it is saying since Congress couldn’t do their jobs and come up with a compromise we are going to leave it all up to 12 people on a bipartisan committee. Much of it will depend largely on who is chosen to be on the super committee. If moderates on both sides are chosen there is a chance of making this work. If not, if there is even one Republican that has signed a tax pledge to Grover Norquist, none of this is going to work; which will trigger the next point.
- Enforcement mechanism established to force all parties – Republican and Democrat – to agree to balanced deficit reduction. If Committee fails, enforcement mechanism will trigger spending reductions beginning in 2013 – split 50/50 between domestic and defense spending. Enforcement protects Social Security, Medicare beneficiaries, and low-income programs from any cuts. (no one wins, Republicans think they are winning because they love cuts, but it will likely throw the economy back into recession) This only happens if the super committee cannot come up with bipartisan legislation by the due date. We’ve seen how well the parties work together. The minute a Democrat utters the word revenue the Republicans will run for the door.
So how did all of this come about? Time for a brief history lesson.
What is the debt ceiling?
The debt ceiling is a legal cap on the amount of money the Treasury can borrow to fund existing government functions. It essentially authorizes the Treasury to borrow the money necessary to pay the bills incurred by the federal government. Think of it like your credit card limit. Say you have a $5000 limit, once you reach that limit either the credit card company will raise that limit or if you are unable to pay they will cancel your card and your credit rating will go down; making it much more difficult to get another card at a decent interest rate.
Do we need a debt ceiling?
Actually, no. The debt ceiling is unique to America. In other countries, when a law is passed the Treasury is given automatic authority to carry it out. A number of former Treasury Secretaries on both sides of the aisle believe it should be abolished. Former Secretary Larry Summers, concurs. “I think that given that Congress has to approve all spending and all tax changes, there is not much logic to the debt ceiling,”
What would happen if the debt ceiling doesn’t get raised?
In Treasury Secretary Timothy Geithner’s words, “If Congress doesn’t agree to an increase in the debt limit by August 2, the United States will be forced to default on its debt, potentially spreading panic and collapse across the globe.”
Even GOP leaders and their big business backers agree. To quote a few of them: The specter of a global financial cataclysm has been described as resulting in “severe harm” (McCain economic adviser Mark Zandi), “financial collapse and calamity throughout the world” (Senator Lyndsey Graham) and “you can’t not raise the debt ceiling” (House Budget Committee Chairman Paul Ryan). In January, even Speaker John Boehner acknowledged as much: “That would be a financial disaster, not only for our country but for the worldwide economy. Remember, the American people on election day said, ‘we want to cut spending and we want to create jobs.’ And you can’t create jobs if you default on the federal debt.”
Even the Republican patron saint Ronald Reagan warned of the cataclysmic scenario of default in an address to Congress in November 1983. “The full consequences of a default — or even the serious prospect of default — by the United States are impossible to predict and awesome to contemplate. Denigration of the full faith and credit of the United States would have substantial effects on the domestic financial markets and the value of the dollar.”
In the simplest of terms, if the U.S. government defaults on payment foreign governments will lose trust in us. They will not want to lend us money or if they do it will be at a much higher interest rate. Effectively because we will be paying more in interest and not on principle the debt will just keep escalating.
Also, defaulting means government checks stop. We stop paying our military, we stop paying Social Security, we stop paying Medicare; we stop paying on Treasury bonds. So now in economically challenged times we have a whole host of Americans who no longer have the cash to pay their bills or pay into the system.
Remember Reagan’s’ Trickle Down Economics? This is Trickle down destruction. If suddenly a large portion of the population isn’t spending money because their government checks aren’t coming or their pensions have lost their value (because they were largely Treasury bonds) then that affects everyone. If people aren’t spending what little money they have left small business will have to start laying off people and then shutting their doors. Kids can no longer afford to go to college because the student loan rates are too high. People will be unable to afford a home loan or a car loan.
So what is the problem? Just raise it already.
The problem we as a country are running into is political posturing, selective amnesia and spin perpetrated by the right.
President Obama asked for a clean bill; a simple one sentence bill that raises the debt ceiling without any other agenda’s attached. Not much to ask for considering that after Reagan tripled the national debt during his term Republicans voted 18 times to raise the debt ceiling. When George W. Bush took a $236 billion dollar budget surplus left to him by his Democratic predecessor Bill Clinton and turned it into a $416 billion dollar deficit; Congress voted 7 times to raise the debt ceiling.
So why the difficulty now?
Essentially, Republicans are trying to win the next election. They believe if the economy tanks under a Democratic President that America will vote Republican in the next election. They refused to pass a clean bill as they had done 25 times for their Republican leaders. They refused to vote on a clean bill instead they added a balanced budget amendment to the bill that slashes spending without any additions to revenue.
As most economists can tell you, the amendment will force the government to make economic downturns worse by actively slashing spending in the face of falling revenue.
Despite the fact that the tax rates are at a historic 60 year low the Republicans will not vote on a bill that even suggests closing tax loopholes to raise revenue. For instance, Exxon made billions in profits last year while the rest of us were floundering, and paid $0 in taxes’ in fact they received millions of dollars in tax subsidies paid for by American people.
Republicans what to make sure that poor struggling corporations such as Exxon don’t ever have to pay a cent because as they put it, “they are the job creators.” Unfortunately, either the GOP can’t read or they just don’t bother with the truth. The fact is most of these large corporations have been laying off U.S. workers and outsourcing jobs overseas.
The question that begs to be asked is; if Republicans are so worried about a balanced budget that they would literally hold the country hostage threatening catastrophe on a global scale…if they are that worried why didn’t they pass a balanced budget amendment when the Republicans held both chambers of Congress from 2003 to 2006, and had a Republican in the White House? They not only didn’t approve a balanced budget amendment, they never even held a vote on it.
The whole fight is manufactured by the GOP. They are doing their best to make the current administration look bad by hurting their constituents.
Their back up plan that seems to have backfired was to force the President to invoke the 14th Amendment and just raise the debt ceiling by executive order. The President had already stated that he would not use the 14th Amendment as it was Congress’s duty to legislate spending. So why would some Republicans hope that the President would just take care of it? For two reasons; one to let them off the hook for any decision making and two; to immediately try to impeach the President. Whether or not impeachment would work (and it would be unlikely) it would be devastating during an election year.
Senate Minority leader effectively gave away the Republican agenda in an interview with The National Journal. ““The single most important thing we want to achieve is for President Obama to be a one-term president”
What it boils down to…
The debt ceiling can be raised with a simple, clean one sentence bill as late as 11pm Aug. 1. Then the parties can rage and rail about budgets all they want at a later date. But, is that what will happen? Doubtful. Likely the current deal will pass, which will harm all Americans.