Menu

Issue Report: US debt ceiling deal

After six months of negotiations, the US government finally agreed upon a plan on August 1st to raise the debt ceiling and avert defaulting on its loans. The six month long deadlock and crisis was created by Republican demands to implement stringent budget cuts to address long-term deficit problems in exchange for their vote to raise the debt ceiling and pay for debts Congress has already incurred. According to many critics, the Republican approach amounted to a form of extortion. It resulted in a measure negotiated at the last minute that cuts $2.4 trillion from the US budget over a decade. The deal focuses significant attention on cutting defense budgets as well as Medicare funding. It includes no new tax increases on the wealthy as Democrats had sought. In the aftermath of the legislation, many wonder whether it was worth it, whether the cuts will do damage to a recovering economy, whether the cuts are properly distributed, and whether allowing default or seeking a Presidential executive order to raise the debt ceiling would have been better. The pro and con arguments and quotes in this debate are framed below.

Crisis averted? Did the deal avert a major crisis?

Debt deal avoids a disastrous default.

"NECESSARY - AND BAD." Milwauke Journal Sentinel Editorial. August 2nd, 2011:

“The deal does allow the nation to dodge a calamitous default – which alone makes it worth supporting. Given the stakes for the economy, we think the decision of some lawmakers to withhold support to be a serious error in judgment.”

"Hold nose, take deal." Miami Herald Editorial. August 2nd, 2011:

“Despite its weaknesses, Congress should approve the plan. Making the nation insolvent would destroy America’s credit rating and the dollar’s credibility as the world’s most stable currency and also bury hopes for a robust economic recovery.”

Deal far less damaging than default.

Timothy Geithner, US Treasury Secretary. "Compromise achieved, reform’s the next chapter." Washington Post. August 3rd, 2011:

“The near-term cuts in spending will not materially add to the pressures on the economy. The direct effects of the cuts — using estimates by Macroeconomic Advisors — are about one-tenth of one percentage point of annual GDP growth, far less than the damage that would have been caused by a prolonged impasse, by adopting the budget proposed by Republicans or, certainly, by default.”

Debt deal averts crisis of Congress' own making.

Robert de Neufville. "Congress' bad debt ceiling deal." Big Think. August 2nd, 2011:

“By passing a deal to raise the debt ceiling, Congress averted a crisis that is entirely of the own making. If Congress had failed to reach an agreement, it would have forced the government to shut down essential services as well as to default on many of its financial obligations. What people usually call “default”—not paying investors who have loaned the government money—could probably have been avoided for a while, but only at the cost of not sending out Medicare reimbursements or giving soldiers their paychecks. Failure to reach an agreement would have done long-term damage to the U.S. position in the world economy, forced the government to pay more interest on its debt, and probably plunged the faltering economy into another real depression. But it’s not as if Congress acted to avert an asteroid. There would have been no crisis at all if Congress simply agreed to spend the money it had already voted to spend. The federal government is not otherwise about to default on its debts.”

Deficit: Does the debt deal help solve the deficit problem?

Deal needed only start deficit reductions.

Some seem to have grandiose expectations for the debt deal; that it somehow failed to fully address all US economic, tax, and deficit problems. Yet, all it really needed to do was prevent default and make a solid first step in addressing the deficit problems. It does this. More can be done later, but a commitment to cut $2.4 trillion over the next decade certainly sets the right tone. It is also designed so that the cuts are less significant in the next couple of years when the economic recovery would suffer most from deeper cuts.

Timothy Geithner, US Treasury Secretary. "Compromise achieved, reform’s the next chapter." Washington Post. August 3rd, 2011:

“Already, some are asking if we cut too much. Others want to know if we did enough about the long-term problem of a rising debt burden. This agreement is the beginning of restoring fiscal sustainability. It is a substantial down payment, but not the end of the debate. The government’s ability to make smart, long-term budget choices has long been broken. This gives us a chance to fix it.”

Debt deal is better than nothing.

Michael Tanner. "Better Than Nothing. But not much." National Review Online. August 3rd, 2011:

“It could be worse. President Obama started out the year calling for an increase in government spending. Instead, the deal included cuts or at least reductions in the rate of spending growth. And, Republicans stood firm against any tax increase. Putting defense cuts on the table is long overdue. And a precedent has been set. Call it the Boehner Rule: Future increases in the debt ceiling will almost certainly have to include additional spending cuts.”

US debt deal reaffirms core social institutions.

Daniel Markovitz. "How the GOP lost on the debt deal." Los Angeles Times. August 2nd, 2011:

“Progressives have reason to lament the incremental cuts in the deal. But that which does no kill a social contract may make it stronger. And neither progressives nor the country should lose sight of the fact that the core institutions of ours — Social Security, Medicare and Medicaid — have all been reaffirmed.”

Debt deal makes needed cuts to military budgets.

Defense spending is often off limits to spending cuts in the US. In this debt deal, however, the defense budget will be cut by nearly $400 billion over ten years. That is quite significant and represents a major break from past years of unfettered, ever-expanding military spending.

Debt deal doesn't cut spending enough to solve deficit

Jerry Moran, Sen R-KS. "Debt deal not good for America." KSALLink.com. August 2nd, 2011:

“This plan may be considered a good deal in Washington, D.C., but it is not a good deal for the future of America. There are virtually no spending cuts in this bill – in fact, it only slows slightly the growth of spending. The amount of spending that is reduced is about $21 billion next year. Given the fact that we borrow $4 billion more each day than what we take in – those savings will disappear in less than a week. It’s unfortunate the country has been through this long drama about raising the debt ceiling and it’s even sadder that the accomplishments are so few.”

Slashing spending hurts economy, revenues, and thus deficit.

Paul Krugman. "The President Surrenders." The New York Times. July 31st, 2011:

“Indeed, slashing spending while the economy is depressed won’t even help the budget situation much, and might well make it worse. On one side, interest rates on federal borrowing are currently very low, so spending cuts now will do little to reduce future interest costs. On the other side, making the economy weaker now will also hurt its long-run prospects, which will in turn reduce future revenue. So those demanding spending cuts now are like medieval doctors who treated the sick by bleeding them, and thereby made them even sicker.”

Deal is purely spending cuts when public wants mix.

Diane Lim Rogers. "Is this really a raw deal for Democrats?" The Christian Science Monitor. August 3rd, 2011:

“It’s particularly notable that the deal is all spending cuts when public opinion clearly wanted a mix of tax increases and spending cuts. In just the most recent example of this fact, a July 18-20 CNN/ORC International poll showed that almost two-thirds of respondents preferred a deal with a mix of spending cuts and tax increases. Only 34% preferred a debt reduction plan based solely on spending reductions.”

Sweeping statements against the debt deal.

Paul Krugman. "The President Surrenders." The New York Times. July 31st, 2011:

“For the deal itself, given the available information, is a disaster, and not just for President Obama and his party. It will damage an already depressed economy; it will probably make America’s long-run deficit problem worse, not better; and most important, by demonstrating that raw extortion works and carries no political cost, it will take America a long way down the road to banana-republic status.”

Tax deal was win for wealthiest and their lobbyists.

"Deal beats default, but delays reckoning." Kansas City Editorial. August 2nd, 2011:

“The deal calls for a first installment of savings, about $900 billion worth, from spending cuts alone. It leaves untouched the more-than $1 trillion per year in tax breaks benefiting individuals and businesses. That sound you heard Sunday night was the clink of champagne glasses from lobbyists toasting the deal.”

To access the second half of this Issue Report or Buy Issue Report



To access the second half of all Issue Reports or