The U.S. debt ceiling: what just happened and what’s up next

By Erica Alini - Tuesday, January 22, 2013 at 12:51 PM - 0 Comments

(Yuri Gripas/Reuters)

What just happened

Predictably, America seems set to avoid yet another manufactured fiscal crisis.

House Republicans introduced legislation (read the full text here) on Monday that would suspend the debt ceiling until May 19.

The bill is somewhat unusual in that, unlike similar legislation in the past, it does not raise the borrowing limit but waives the cap entirely until the set date in May. As Politico explains, this was fine political maneuvering on the part of Republican lawmakers, who thus avoided agreeing to a “specific dollar amount that could be used against them in campaign ads.”

The draft legislation also contains a provision that would withhold pay for members of Congress unless they pass a budget by April 15 (it is a feat that has eluded the U.S. Senate in the past). The GOP is branding this as a “no budget, no pay” measure, although, in fact, it simply delays paying members of Congress until the end of 2014 at the latest.

The prospect of a likely deal on the borrowing cap spurred a series of bullish bets in financial markets, and U.S. observers around the world are drawing a big sigh of relief.

Rewind: a bit of background on the debt ceiling

What the House Republicans’ bill will likely avoid isn’t so much a full-blown default but a technical default. As Keith Hennessey, who was White House National Economic Council Director under former President George W. Bush, argued last week, a scenario in which the U.S. government would fail to pay bond-holders on time (which would without question trigger a credit rating downgrade and increase America’s borrowing costs, not to mention cause utter panic in financial markets) was never really in the cards.

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The Fiscal Cliff explained

By Chris Sorensen and Jaime J. Weinman - Wednesday, January 2, 2013 at 1:39 PM - 0 Comments

Saul Loeb/Getty

1. The 11th-hour deal to limit the damage from the U.S. from driving over the “fiscal cliff” on Dec. 31 is being hailed as a success insomuch as it averts an immediate crisis (pushing the world’s largest economy into recession) and represents a rare bipartisan agreement in Washington (although a deal was inevitable given the dire consequences). Under the bill, which is expected to be made retroactive to Jan. 1, income and capital gains taxes raised on the wealthiest Americans for the first time in decades. However, a payroll tax holiday will also be allowed to expire for all American workers. What the deal didn’t address is the other half of the so-called cliff: hundreds of billions worth of planned spending cuts and the debt ceiling.

2. The fiscal cliff was a totally manufactured term referring to a self-manufactured crisis on the part of the U.S. government. It started during another self-manufactured crisis, the debt ceiling crisis of 2011, when as an attempt to kick the can down the road on that fake crisis, the Congress decreed that a “supercommittee” would have to come up with a mix of tax increases and spending cuts. If the supercommitee did nothing by Jan. 1, 2013, a mix of heavy spending cuts and tax increases totaling an estimated $600 billion would happen automatically. Inevitably, the supercommitee turned out not to be so super, and the Congress was faced with trying to pass a law to avoid the problems they could have avoided by simply raising the debt ceiling cleanly in 2011.

3. The fiscal cliff follies are simply a trial run for the next fake crisis, which will occur this year when Congress has to raise the debt ceiling again. Traditionally, the debt ceiling was simply a fait accompli, since it’s just a formality that most countries don’t even have. But during the Obama administration, the Republican House has decided to use the debt ceiling to extract concessions on taxes and spending. Their supporters argue that the U.S. has a spending crisis that needs to be dealt with before the debt ceiling is raised; their detractors accuse them of holding the full faith and credit of the U.S. hostage. But one thing is for certain: this is the new normal, at least while the Republicans control the House – and thanks to gerrymandered districts, they are expected to control the House for the next decade. The “fiscal cliff” was just a preview of things to come.

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Should Barack Obama try a little (legal) tender-ness?

By Colby Cosh - Tuesday, December 11, 2012 at 6:53 AM - 0 Comments

Just about my favourite thing in the world is when someone comes up with an idea for a policy move that (a) seems completely ludicrous but (b) is completely legal and (c) would probably work. With the U.S. headed for the so-called “fiscal cliff,” there is renewed discussion of a weird jiujitsu move that President Obama could conceivably use to elude the congressional debt ceiling.

The executive branch is, as a general rule, not allowed to incur debt in defiance of Congress, and the U.S. Mint’s printing of money is strongly circumscribed by statute. But last year a blogger named Carlos “Beowulf” Mucha noticed an oddity in the U.S. Code: the Treasury does have an explicit unrestricted right to order the mint to create collectible platinum coins of arbitrary face value. They can’t be gold or copper or aluminum; they have to be platinum. Under this theory, the President could tell the mint to strike a couple of platinum coins with denominations of $1 trillion each. He would then deposit them with the Federal Reserve, in what is actually the ordinary fashion, and the Fed would in turn issue the Treasury a credit of $2 trillion; since the physical specie is there at the bank, no “debt” is technically created at all.

This would be an executive branch intrusion on the Fed’s acknowledged privilege of controlling the money supply. It’s probably the kind of loophole Americans probably do not want to establish a precedent for exploiting. (Insert “Pretty soon you’re talking real money” joke here.) But amidst controversy over the Fed’s management of monetary aggregates, the platinum fantasy is finding enthusiasts in surprising places: not only in the left blogosphere where it originated, but amongst “market monetarist” critics of the Fed (who believe that the central bank should be targeting nominal GDP growth instead of inflation).

Among leading econopundits, Felix Salmon charged that magic platinum coins would represent “the utter failure of the U.S. political system and civil society.” Matt Yglesias questioned whether it was really possible but admitted that the idea “highlights a very accurate point”—that the U.S. controls the unit of account in which its debts are denominated, and so has (finite) room to manoeuvre in ways other countries don’t. Market monetarist Scott Sumner asked whether it was a “brilliant masterstroke” or a “loony idea” and decided “I can confidently answer ‘both’.” A man after my own heart.

The genius of Westminster

By Aaron Wherry - Friday, August 26, 2011 at 11:30 AM - 13 Comments

Fareed Zakaria wonders if America would be better off with a parliament.

Remember, the political battle surrounding the debt ceiling is actually impossible in a parliamentary system because the executive controls the legislature. There could not be a public spectacle of the two branches of government squabbling and holding the country hostage.

If we’re in for another five years of this squabbling in the U.S., we are going to make presidential systems look pretty bad indeed.

The trouble with too much democracy

By Andrew Potter - Friday, August 5, 2011 at 9:00 AM - 30 Comments

Jewel Samad/AFP/Getty Images

The most telling moment of the recent standoff over talks to raise the American government’s debt ceiling came on July 22, when President Barack Obama called a press conference to announce that House Speaker John Boehner had backed out of the negotiations. “I’ve been left at the altar twice now,” Obama pouted. In case the image of the President as a jilted lover was not clear to everyone watching, he added that he had spent the previous day waiting for Boehner to return his phone calls.

The whole affair has left a lot of Americans in a state of bipartisan disgust, with citizens from all points on the political compass cursing out their elected representatives. Yet it doesn’t seem to have occurred to many people that there is something structurally flawed with a system that allows the head of just one legislative house to treat the supposed leader of the free world as his last choice for the senior prom. If there’s anything that needs cursing out it isn’t the elected politicians, but the constitution of the United States.

America is a mess. The economy isn’t growing, the job market is a wasteland, its infrastructure is crumbling. On any number of measures, from education to health care to technological innovation, the country is getting beat by up-and-comers in Asia, Scandinavia, and South America. But the real threat to America right now is not economic decline or technological stagnation—those are just the knock-on effects of a much deeper rot.

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Who really won the U.S. debt debate?

By John Parisella - Tuesday, August 2, 2011 at 2:30 PM - 22 Comments

I followed the debate over the debt ceiling in the U.S. from Europe, where the commentators were perplexed about why the U.S. government would risk a default for the sake of purely partisan politics. With the deal done and a possible catastrophe is averted, the discussion has shifted to who won and who lost.

Conservatives like columnist Charles Krauthammer have supported raising the debt ceiling all along while acknowledging the work done by Republican negotiators. Others, such as Utah Senator Mike Lee, a leading Tea Party activist, and most GOP presidential hopefuls, opposed it. Respected liberal economist Paul Krugman wrote in the New York Times that President Obama had surrendered. So, who actually won? Was there a winner?

Clearly, this was a manufactured crisis, as raising the debt ceiling has never stirred so much down-to-the-wire confrontation in the past. President Reagan raised it 18 times and he is the darling of the Republican right to this day. Continue…

Debt deal likely to pass

By macleans.ca - Tuesday, August 2, 2011 at 12:19 PM - 0 Comments

The U.S. Senate and President Barack Obama are expected to easily pass a debt ceiling compromise Tuesday, closely escaping economic disaster. The deal includes cutting the country’s deficit and lifting its $14.3 trillion debt ceiling enough to last until after the November 2012 elections. The debt battle has raged in Washington for weeks, as Democrats and Republicans argued over spending cuts and revenue generation through tax hikes. The bitter conflict made investors nervous about a weak domestic economy, and elevated fears about debt problems in Europe. Arizona Democratic Representative Gabrielle Giffords made her first trip to the Washington since being shot in the head in January to cast her vote – a “yes” – at Monday’s House vote on the debt bill.

Reuters

The rhetorical deficit

By Aaron Wherry - Tuesday, August 2, 2011 at 10:10 AM - 46 Comments

Tabatha Southey considers the rhetoric of public debt.

It’s easy to alarm people over a deficit. It’s a high number and people are forever being told that it’s theirs and their children’s debt and specifically how much of it is theirs, per capita. But no one ever tells them how much highway they own, per capita, or what section of the Grand Canyon is theirs. It’s a very one-sided, frequently opportunistic way of expressing the situation.

The consequences of playing a game around the largely artificial debt ceiling are very real. This is politics triumphing over economics, but without the triumph.

The centre in crisis

By Aaron Wherry - Friday, July 29, 2011 at 5:13 PM - 47 Comments

Bob Rae draws lessons from the U.S. debt crisis.

The deep partisanship that has marked the crisis in the United States Congress has some lessons for Canadians.  Polarisation is not the “new normal,” as New Democrats and Conservatives are preaching.  It corrodes the body politic and takes us away from the simple truth that most people want a moderate, intelligent politics that’s based on facts, evidence, good values and compromise … we need to understand that most goals in politics, as they are in hockey or soccer, are scored from the centre.  That’s where the action is, and that’s where most Canadians are. But not the dead centre where it’s safety first and always ‘on the one hand and the other hand,’ but rather an action-filled, resilient, and lively centre that is not afraid of ideas, debate, and looking at issues afresh.  And that’s where the Liberal Party needs to be as well.

Ideological purity and governance

By Aaron Wherry - Friday, July 29, 2011 at 12:00 PM - 7 Comments

In light of the U.S. debt crisis, Fareed Zakaria compares the American system to parliamentary governance.

Some political scientists long hoped that American parties would become more ideologically pure and coherent, like European parties. They seem to have gotten their wish – and the result is abysmal.

Here’s why: America does not have a parliamentary system like Europe’s, in which one party takes control of all levers of political power – executive and legislative – enacts its agenda and then goes back to the voters. Power in the United States is shared by a set of institutions with overlapping authorities – Congress and the presidency. People have to cooperate for the system to work.

See previously: Debt and responsibility

Debt and responsibility

By Aaron Wherry - Thursday, July 28, 2011 at 12:37 PM - 3 Comments

John Pepall, author of Against Reform, points to the U.S. debt crisis as another reason we should appreciate our parliamentary system.

Under parliamentary government, a prime minister must take responsibility for a budget. If it is passed he will have to answer to the voters for it. If the country prospers the voters will cheer him on to re-election. If not, he will have to shoulder the blame and electoral defeat. If it is not passed there will have to be an election and the voters can decide whether they like the budget or would prefer something else. 

One way or another parliamentary government forces politicians to take responsibility and holds them accountable …  In the U. S. power is dispersed and responsibility is avoided. 

Boehner pushing through Republican plan to prevent U.S. default

By macleans.ca - Thursday, July 28, 2011 at 10:53 AM - 0 Comments

As politicians in Washington continue to debate how to prevent an unprecedented debt default on Aug. 2., House Republicans plan to push through a bill Thursday that aims to raise the U.S. debt ceiling while cutting $900 billion in spending over the next decade. The legislation, however, faces the threat of a presidential veto. U.S. President Barack Obama supports an alternative plan put forward by Senate Majority Leader Harry Reid. That plan offers comparable cuts, but would raise the debt ceiling by a record-breaking $2.7 trillion, thus avoiding a replay of the borrowing-limit debate until after the 2012 elections. Reid’s plan is also unlikely to pass without compromise, since Democrats don’t have enough votes to overcome Republican opposition. Analysts predict that failure to raise the nation’s debt ceiling by next Tuesday could be catastrophic for the still-recovering U.S. economy. It could also further de-stabilize the global economic climate.

CBC News

Plan for the worst

By Aaron Wherry - Tuesday, July 26, 2011 at 12:59 PM - 25 Comments

Peter Devries says if Jim Flaherty is really worried about European and American debt, he needs to budget for it.

Good budget planning would include an adequate amount of “insurance” or “prudence” to guard against unforeseen events and inevitable forecasting errors. The purpose of the “insurance” is to protect the fiscal targets as much as possible and to give confidence to financial markets and stakeholders that the targets might actually be achieved. This enhances the credibility of the fiscal plan…

The Minister of Finance has expressed his concern about the debt crisis in Europe and the serious fiscal imbalance in the U.S. Despite the evidence that economic growth is slowing in the U.S., and that interest rates will not only rise in coming years but also be more volatile, he has a built a budget framework that offers very little protection against adverse international developments.

Obama, Boehner spar over debt crisis

By macleans.ca - Tuesday, July 26, 2011 at 11:31 AM - 0 Comments

U.S. President Barack Obama called for a compromise over the nation’s debt crisis in a primetime speech Monday night. Congress has been at odds on legislation to avoid a default, which will be triggered if legislation isn’t signed by August 2 to raise the debt ceiling. Obama said a Republican plan would only result in another debt emergency in six months’ time. The president has supported tax increases for the rich and spending cuts to reduce federal deficits. House Speaker John Boehner retaliated immediately following Obama’s speech with his own televised address, calling the “crisis atmosphere” the president’s fault and that the White House’s plan amounts to a giant tax hike.

CBC News

Stocks tumble amid debt deal impasse

By macleans.ca - Monday, July 25, 2011 at 11:28 AM - 0 Comments

Global stock markets dropped on Monday as U.S. politicians again failed to reach a deal to extend that country’s debt ceiling. With an August 2 deadline for a deal now days away, investors in Asia, Europe and the United States have begun to react, pulling money out amid fears of an unprecedented U.S. default, despite reassurances from Secretary of State Hillary Clinton that she is confident a deal will be struck. Congressional Republicans have so far refused all offers of compromise on the debt ceiling from U.S. President Barack Obama. Obama has said he is willing to slash spending in return for some marginal increases in revenue, but Republicans have so far declined these overtures.

The Globe and Mail

Two crises, but one is far more dangerous

By Andrew Coyne - Monday, July 25, 2011 at 9:00 AM - 4 Comments

Kevin Lamarque/Reuters

On either side of the Atlantic, the scene is the same: dramatic closed-door negotiations; days and nights of brinksmanship and finger-pointing; fears of debt spirals competing with fears of default.

What is different is the reaction to each. The American economy is the largest in the world, its government the biggest spender and heaviest borrower in the world. The consequences if the United States were to default on its debts would be incalculably greater than if Greece were to, harming not only its own borrowing ability but the whole structure of international credit. If the “full faith and credit” of the United States of America is not a safe bet, after all, what is?

And yet, with a possible default just days away, investors seem unperturbed. The interest rate on American 10-year bonds remains among the lowest in the world, and has been falling for months. It is tiny, perennially penniless Greece that has the financial markets in an uproar. This week’s meeting of European leaders is being pitched as a last chance to avert disaster, with agreement on a bailout (a second, actually) far from assured.

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U.S. Senate expected to reject Republican-backed debt plan

By macleans.ca - Friday, July 22, 2011 at 11:45 AM - 0 Comments

The U.S. Senate is expected to vote down a Republican-backed plan to cut government spending, increase the country’s debt ceiling and implement a constitutional amendment for a balanced budget. The legislation has already passed the Republican-controlled House of Representatives, but the Democrats who hold sway in the Senate have called the plan “weak and senseless.” President Barack Obama has also promised to veto the legislation. American lawmakers have been arguing for weeks over how to raise the country’s $14.3 billion borrowing limit. Obama has agreed to cutting trillions of dollars in government spending over the next decade, but also wants to raise revenues to preserve public services. Republicans have rejected this approach, opposing anything they perceive as a tax increase. Despite the setbacks, White House spokesman Jay Carney says the Obama administration is “absolutely confident” the debt ceiling will be raised by August 2, when the government runs out of money to pay its debt obligations.

Voice of America 

Moody’s places U.S. debt rating under review

By macleans.ca - Thursday, July 14, 2011 at 1:48 PM - 1 Comment

Moody’s rating agency has indicated it is considering downgrading the U.S. triple-A debt rating due to the “rising possibility” the U.S. could default on its debt. While the agency said the risk of U.S. not raising its debt threshold in time to prevent a missed payment on outstanding bonds and notes is low, it’s not impossible. U.S. Federal Reserve chairman Ben Bernanke said a default would be disastrous. Negotiations at the White House about raising the debt ceiling are set to continue Thursday. The U.S. hit its $14.3 trillion debt limit on May 16, but has adjusted its spending and accounting to continue operation.

BBC News

How politics have come to dominate the debt ceiling debate

By John Parisella - Monday, July 11, 2011 at 4:43 PM - 38 Comments

Even though we have heard countless references and discussions about the risks associated with rising the US debt ceiling, we should not be surprised that there is still no deal as the supposed deadline of August 2 looms. The debate over a compromise solution has become so politicized both sides are now hardening their positions rather than looking for compromises.

The Republicans have staked their positions: no new taxes and massive spending cuts, in particular to entitlement programs. The presence of a vocal and uncompromising Tea Party contingent makes it difficult for the more moderate Speaker of the House, John Boehner, to deliver votes on a compromise deal with Barack Obama. Consequently, the odds of an historic deal between Obama and the Republicans appear very remote. Continue…

Fiscal faceoff on Capitol Hill

By Luiza Ch. Savage - Saturday, April 16, 2011 at 12:10 PM - 1 Comment

Kevin Lamarque/Reuters

The weeks of threats of a government shutdown, and the late-night political brinkmanship between House Republicans, Senate Democrats and President Barack Obama, turns out to have been a mere warm-up. America’s grand fiscal drama is just getting started.

The standoff that kept the public on edge about national parks and tax-return processing only resolved spending for the rest of the fiscal year, which ends on Sept. 30. Leaders ultimately agreed on US$38.5 billion in budget cuts across a range of government departments. It’s a massive one-year cut not seen since the Reagan era, but in terms of the projected 2011 deficit of $1.6 trillion (all figures in U.S. dollars), a mere rounding error. Still, Republican House Speaker John Boehner claimed victory for wringing the concessions from the Democratic-led White House and Senate. But the Republican lawmakers—swept into office by Tea Party fury and a promise to cut $100 billion in spending the first year—pronounced themselves disappointed.

Democrats shielded spending for early childhood education, university grants for low-income students, and medical research grants, among others. And Republicans failed in their effort to use the funding deal to cut off government funding for Planned Parenthood, which provides contraception and abortion, and to roll back some environmental regulations. (Social conservatives did, though, extract a price for the final late-night compromise: a ban on government funding for abortions in Washington, which is overseen by the federal government. This led to the remarkable sight of the outraged Democratic mayor of the nation’s capital, Vincent Gray, arrested as he protested the deal in front of the Capitol building.)

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