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Debate: US debt ceiling deal

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-*'''The debt deal ignores/distracts-from unemployment''' [ Rick Newman. "3 Ways the Debt Deal Fails America." News and World Report. August 2nd, 2011]: "It shows total disregard for the jobs problem. Surveys repeatedly show that Americans' No. 1 concern isn't the national debt. It's unemployment. And they're right about that. The lack of hiring is the biggest single problem in the economy right now. There are still 14 million Americans out of work, and perhaps an equal number who have stopped looking for work. The unemployment rate is stuck more than four percentage points higher than it was before the recession. The weak job market is the biggest reason the housing bust persists, spending is weak and the whole economy has been going sideways this year. Washington has now spent the entire summer obsessed with a deal that does absolutely nothing to address the jobs problem. Politicians will return from the traditional August recess with no jobs agenda." 
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===Politics: What are the political considerations? === ===Politics: What are the political considerations? ===

Revision as of 02:21, 5 August 2011

Was it an acceptable deal? What are the pros and cons?

Background and context

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
the long-term deficit problems in exchange for their vote to raise the debt ceiling and pay for debts on expenditures the Congress has already allocated in previous measures. The Republican approach amounted to some form of extortion, and resulted in a measure 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. 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?


"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."


  • 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 not 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 doesn't cut spending enough to solve deficit Jerry Moran, Sen R-KS. "Debt deal not good for America." 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."
  • Debt deal cuts spending too early for recovery Paul Krugman. "The President Surrenders." The New York Times. July 31st, 2011: "Start with the economics. We currently have a deeply depressed economy. We will almost certainly continue to have a depressed economy all through next year. And we will probably have a depressed economy through 2013 as well, if not beyond. The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record."
  • 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."
  • Bitter debt-deal process undermines confidence in economy. "The cost of uncertainty." Chicago Tribune Editorial. August 2nd, 2011.: "The economy if anything feels worse than it actually is. Call it sentiment, confidence or karma: We're feeling down. The deficit-reduction spectacle in Washington has distressed Americans across the political spectrum. It's a very good thing that Washington has started to confront its spending addiction. But Congress should not have taken this to the brink of possible default. That doesn't bode well for the next round of debt reduction - and there will have to be a next round. Remember, Congress has not agreed to reduce spending - it has agreed to reduce the rate of growth in spending. This bitter debate and the modest result will leave job-creators and consumers feeling uncertain. The Institute for Supply Management's July manufacturing report shows how bad feelings can hold back the economy. Compiled by a private trade group, this indicator is based on a national survey of purchasing executives. It's considered a fairly straightforward snapshot of how America's industrial economy is faring. Production and employment were weak, but that wasn't the worst of it."
  • 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."

Economy: Does the US debt deal preserve the economic recovery?


  • Debt deal's modest cuts protect recovering economy Some commentators, such as Paul Krugman, believe no spending cuts should be considered at all during the US economic recovery, and instead only paid down later. Along this line of reasoning, it may be a good thing that the spending cuts only amount to $2.4 trillion over 10 years, instead of the $4 trillion considered by a bipartisan committee. The cuts might just be modest enough enough to avoid stalling the recovery, but significant enough to start the years-long process of reducing the deficit. In other words, it might be a good balance. If an equal number seem to think it goes to far as do those that think it doesn't go far enough, then perhaps it's in the right spot.
  • With long-term savings locked, US can refocus on jobs. Timothy Geithner, US Treasury Secretary. "Compromise achieved, reform’s the next chapter." Washington Post. August 3rd, 2011: "By locking in long-term savings, Congress will have more room in the fall to pass additional short-term measures to strengthen the economy — such as extending the payroll tax cut, which provides an average of a thousand dollars to the after-tax incomes of working Americans; extending unemployment benefits; and financing infrastructure investments. After all, strengthening growth and putting more Americans back to work are among the most important things we can do to improve our fiscal situation today and over the long term."


Politics: What are the political considerations?


  • Debt ceiling helps Obama appeal to moderates. Chris Cillizza. "The debt ceiling winners and losers." Washington Post. July 31st, 2011: "President Obama: The president needed a deal of some sort to prove that he was capable of making the government work — even if it took until the eleventh (and a half) hour to strike the compromise. Liberals are likely to be deeply unhappy about the nature of the deal, which includes no increases in taxes or revenue. But remember that Obama’s target constituency in 2012 is not his base but rather independent and moderate voters. And those fence-sitters love compromise in almost any form."
  • Debt deal was democracy in action, not "extortion." "On the debt ceiling deal." The Economist. August 1st, 2011: "Paul Krugman is flipping his wig over this hand-waving, non-binding promise to mildly decrease the future rate of spending growth. Not only will the debt-ceiling deal retard growth, Mr Krugman argues, but "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.' Where Mr Krugman sees 'raw extortion' tending toward 'banana-republic status' I see 'democracy'. Kindred Winecoff points us to this insightful piece by Sean Theriault, a professor of government at the University of Texas, who argues that our members of Congress are acting exactly as they were elected to.' Mr Theriault says that message voters sent to Congress in the 2010 elections came through loud and clear."


  • Surrender on debt deal emboldens GOP to continue extorting. Paul Krugman. "The President Surrenders." The New York Times. July 31st, 2011: "Republicans will surely be emboldened by the way Mr. Obama keeps folding in the face of their threats. He surrendered last December, extending all the Bush tax cuts; he surrendered in the spring when they threatened to shut down the government; and he has now surrendered on a grand scale to raw extortion over the debt ceiling. Maybe it’s just me, but I see a pattern here."
  • Liberals lost in deal w/ no tax increases, sharp cuts. Chris Cillizza. "The debt ceiling winners and losers." Washington Post. July 31st, 2011: "Liberals: As the basic framework of the deal emerged, liberals began voicing their discontent about a bargain that left their side wanting more. With no revenue in the initial phase of the legislation and Medicare cuts on the table in the second phase, there’s not much for the ideological left to celebrate."

Pro/con sources



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