Politics Decoded

Debt Ceiling Crisis

(Fiscal Cliff)

The Tea Party House Republicans added about $1.3 billion annually to the interest payment on the national debt in 2011, when they threatened to not raise the debt ceiling.  Citing the debt ceiling fight as a major factor,  the S&P lowered our credit rating from AAA  to AA+ for the first time in history. 

The debt ceiling is the spending limit Congress sets on the amount the federal government can legally borrow through the end of our fiscal year ending on September 30.   It applies to public debt (U.S. bonds) and federal government trust funds (Social Security and Medicare.)  Every time Congress votes for a spending hike or tax cut, they are suppose to keep this budget/debt ceiling/statutory limit in mind.   But if Congress goes over that limit, they must raise the debt ceiling, so they can pay the bills they’ve already incurred.  The debt ceiling is not set in stone, it’s there to remind Congress they need to keep within a budget.

Despite the debt ceiling being raised routinely in the past (17 times under Reagan and 7 times under Bush),  the Tea Party Republicans refused to do so unless their demand of massive spending cuts (with absolutely no tax increases) was met.  They refused to compromise.  Some were even more outlandish.  Michele Bachmann demanded that we defund the health care law.  Marco Rubio said it must include fundamental tax reform, an overhaul of our regulatory structure, a cut to discretionary spending, a balanced-budget amendment and reforms to save Social Security, Medicare and Medicaid before he would vote for it.  

Many economists said making  drastic spending cuts would weaken our already fragile economy.   According to Timothy Geithner, defaulting on our debts would have  “catastrophic economic consequences that would last for decades” 

Republican Senator Grassley said, “Refusing to raise the debt limit is like refusing to pay your credit card bill — after you’ve used your credit card.  The time to control the deficits and debt is when we are voting on the spending bills and the tax bills that create it.  Raising the debt limit is about meeting the obligations we have already incurred.”   Bill O'Reilly said, "You can imagine what the worldwide markets will do if the USA defaults on obligations in August. All of us will suffer economically because foreign investors would begin to pull their money out of America. The dollar would plummet, along with stocks."  When Republicans demanded that Hurricane aid must be offset by spending cuts, Governor Christie said, “You want to figure out budget cuts, that’s fine. You’re going to turn it into a fiasco like that debt-limit thing, where you’re fighting with each other for eight or nine weeks. And you expect the citizens of my state to wait? They’re not going to wait, and I’m going to fight to make sure that they don’t."     

In response to the Republican demands for massive spending cuts, President Obama proposed a deal to reduce the deficit by $4 trillion.  It would make cuts to Social Security, Medicare, Medicaid, and plug tax loopholes.   But the Republicans refused because they have taken Norquist’s vow to not allow any tax increase, including closing loopholes or allowing the Bush tax cuts to expire. 

Just days away from the U.S. defaulting on its debts, the Budget Control Act of 2011 was signed on 8/2/11.  It should should give us some breathing room until early 2013.  It allowed the debt ceiling to be temporarily increased by up to $900 billion, if there were $900 billion in spending cuts over the next 10 years to offset it.  And a bipartisan  “super committee” was given a 11/23/11 deadline to develop a plan to lower the debt by at least $1.2 trillion over the next ten years. Congress would than have the opportunity to have a straight "yes" or "no" vote on the "super committee" plan, with no amendments or filibusters allowed.  If they failed to compromise, a "trigger" would take place; that neither Democrats or Republicans would be happy with.

Within a few days, the S&P lowered our credit rating from AAA to AA+.

Reaching a stalemate, the "super committee" failed to to meet the 11/23/11 deadline because Republicans refused to include any tax revenue in the plan.   They won't even allow the Bush tax cuts to expire for the wealthy.

This failure to compromise will enact the "trigger" in 2013.  The Bush tax cuts will be allowed to expire for everybody on 12/31/12 (not just for the wealthy as the Democrats requested) and a $1.2 trillion across-the-board cut will be evenly divided between defense and non-defense spending (such as education, transportation and Medicare payments to health care providers.)

The non-partisan Congressional Budget Office and other forecasters are warning that if this trigger is allowed to take place it could throw us back into a recession.