German statesman Otto von Bismarck is credited for pointing out that “laws are like sausages: It is better not to see them being made.” Never has the truth of that old saw been more evident than during the week through Aug. 2, when the world witnessed the sorry spectacle of U.S. politicians scrambling to stitch together a deal to extend the nation’s debt ceiling in order to avert a default on debt payments.
More distressing than the shameless game of chicken that was played with the U.S. economy, with America’s international standing and, by extension, with the entire world was the fact that this crisis was entirely self-inflicted.
In the United States, a two-step budgeting process exists. First, the legislative branch approves a budget, then it votes again to allow the government to borrow the money needed to implement that budget. (The second step is needed because the U.S. usually spends more money than it receives in revenue.)
Since 1962, Congress has voted 74 times to raise the debt ceiling, 30 times since 1980.
On Aug. 2, the U.S. would have hit the debt ceiling. In the absence of an agreement to raise it again, the U.S. government would have been forced to rely on available cash to pay bills that came due. Unfortunately, that amount was substantially less than the amount owed, meaning that the U.S. could not have paid all its debts and would have gone into default.
Since the U.S. Treasury note, the gold standard for securities, is held by lenders throughout the world as a safe and secure asset, a U.S. default on debt would have washed through the global financial system like a virtual tsunami. Yet, until the last minute, even the prospect of default was not enough to motivate lawmakers to increase the debt ceiling unless their specific conditions for reducing future deficits were met.
A small group of Republican representatives who were elected in 2010 with the support of the “tea party” and who are determined to shrink the size of government adamantly refused to agree to any additional borrowing unless the government’s deficit was cut by an equal (or greater) amount.
Normally, fiscal prudence should be applauded, but that demand is dangerous when the means of reducing deficits and balancing accounts are constrained. Tea party representatives and like-minded Republicans insisted that no additional tax revenues come into play.
Governments have two ways to balance accounts — reducing spending or increasing taxes. The hardliners took tax increases off the table — either because of concern that increasing taxes would be bad for an economy on the ropes or because of a desire to reduce the size of government.
Yet, cutting government spending is bad for an economy in recession for the same reason that tax increases are: It reduces badly needed stimuli. That logic suggests that the GOP zeal to balance budgets reflects another agenda — that of reducing the size of the federal government in general and the welfare state in particular. That may be a desirable goal, but the tactics that were used in this instance were reprehensible.
For lack of a better word, it amounted to hostage taking. (While many Republicans condemn the use of such language to describe their behavior, Senate Minority Leader Mitch McConnell conceded that his party had learned that the debt ceiling “was a hostage that’s worth ransoming.”)
The result was a debt deal struck at the very last minute that extended the ceiling by $2.4 trillion through 2013. It also calls for $900 billion in budget cuts to be spread over 10 years.
A special congressional committee will identify up to $1.5 trillion in additional deficit reductions, through both tax reform — such as the closing of loopholes, which will not be called tax increases — and future cuts in programs.
If the committee cannot come up with $1.2 trillion in savings, then spending cuts will kick in automatically. In theory, these cuts will hit programs favored by both parties; ostensibly this will prod them to make a deal.
While those numbers look big, they are a little more than half the size of the cuts that were reportedly on the table during negotiations between President Barack Obama and House Speaker John Boehner. But instead of making a truly historic deal that could have reshaped the trajectory of U.S. government spending — and the government itself — Mr. Boehner walked away because of Mr. Obama’s demand that tax revenue be increased as government was reduced. That was too much for hardliners in Mr. Boehner’s party, and rather than fight for a truly bipartisan solution, Mr. Boehner abandoned the talks.
The posturing and theatrics by lawmakers to cut a deal seemed more aimed at setting the stage for 2012 elections than at resolving a fiscal crisis that threatened to swamp the U.S. As a result, after the dust settled, the U.S. Treasury note took a hit even though a default was averted. The note had maintained the top AAA rating by all three credit rating agencies, but on Friday, Standard & Poor’s downgraded the rating by one notch to AA-plus. S&P said it was not satisfied by the spending cuts contained in the deal to raise the debt ceiling.
All of this probably could have been averted by a vote for a clean bill to raise the debt ceiling, as had happened dozens of times over the past three decades.
Instead, the world was treated to an embarrassing spectacle and seeming disdain for the responsibilities that come with being the world’s leading economy.
The credibility of the U.S and that of Mr. Obama have been badly wounded by this episode. What hostage will be taken next?
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