House Approves Deal Ending Debt Ceiling Crisis
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The Fiscal Times
August 1, 2011

The House Monday evening narrowly approved a bipartisan plan negotiated by President Obama and congressional leaders to end a months-long debt ceiling crisis that threatened to trigger a global financial crisis and  possibly send the struggling economy into another tail spin.

Capping a day of bitter complaining by liberal Democrats over cuts in programs to the poor and elderly, Republican defense hawks over further reductions in Pentagon spending, and Tea Party conservatives insisting the plan doesn’t go far enough, the House voted 269 to 161 to approve a measure extending the Treasury’s borrowing authority through 2012.  The plan aims to reduce deficits by at least $2.3 trillion over the coming decade.

One bright moment in the otherwise dreary battle over the debt ceiling plan was the surprise appearance on the House floor of Rep. Gabrielle Gifford, D-Ariz., who was gravely wounded in the head by a gunman near Tucson last January.  Republicans and Democrats alike applauded her as she voted in favor of the debt deal and mingled with colleagues.

“It was very significant,” said House Minority Leader Nancy Pelosi, D-Calif. “I did not encourage her to come back. I told her that, well first things first, but she was very eager to come. This was an important vote for her.”

Getting the deal through the House dominated by arch conservatives demanding a major downsizing of government and the $1.5 trillion annual deficit was by far the biggest challenge, and the Senate was expected to follow suit on Tuesday, assuring that the government wouldn’t suffer its first default in history.  House Speaker John Boehner, R-Ohio, and Majority Leader Eric Cantor, D-Va., spent much of the day trying to win over a majority of the 240 Republicans in their caucus.

Cantor, a favorite of the conservatives and a thorn in the side of Obama for much of the year, said the measure “while not perfect, will begin to change the culture here in Washington.”

But as a sign of the unpopularity of the compromise announced Sunday evening by Obama and House and Senate congressional leaders, only 174 of 240 Republicans and 95 of 190 Democrats voted for the agreement, which will allow the president to raise the $14.3 trillion debt ceiling by as much as $2.4  trillion through  2012.

Pelosi was so disappointed with the measure that she declined to line up support for the bill. Vice President Joseph Biden was dispatched to Capitol Hill earlier today to try to calm outraged Senate and House Democrats who complained that Obama had pretty much given away the store to the Republicans by agreeing to steep long-term cuts in government programs and Medicare payments to providers, while wealthier Americans and corporations were not being forced to share in the burden by paying higher taxes.

“I don’t see how this deal helps us with jobs,” said liberal Rep. Elliot L. Engel, D-N.Y. “I don’t see how cutting these Pell grants stimulates the economy and helps us with jobs. I’m not going to be taken for granted. I have one vote like everyone else.” Rep. Jesse L. Jackson, D-Ill., bitterly complained that “We were given a choice between a job killing default and job killing austerity, and we chose job-killing austerity.” Rep. Brad Sherman, D-Calif., added that: “We dodged a bullet, but nobody in America is happy with the economy or the decision we have to make.”

The compromise agreement will do the following:

  • Allow the $14.3 trillion debt ceiling rise by as much as $2.4 trillion, giving the government additional powering power in increments well into 2013.
  • Achieves about $1 trillion in savings over 10 years by imposing caps on discretionary spending. In the first two years, the savings would be divided between domestic and defense/national security programs.
  • Create a special bipartisan joint committee of Congress, made up of six members from each chamber, tasked with developing legislation to achieve at least $1.5 trillion in future deficit reduction by Thanksgiving. The committee’s legislation, wih can include entitlements and tax reform, will be guaranteed an up or down vote, without amendments, by Dec. 23.
  • Activate a budget enforcement mechanism, forcing across-the-board spending cuts  if the  joint committee or Congress fails to agree to legislation achieving $1.2 trillion of deficit reduction Half of those enforced savings would come from defense, while Social Security, Medicaid, veterans benefits and other social safety net programs would be exempt. Medicare savbings would be capped at 2 percent and limited to payments to providers.
  • Both the House and the Senate will schedule votes on a balanced budget amendment to the Constitution.

The legislation includes up to $850 billion in defense cuts, which has some lawmakers fearing for the worse. Sen. John McCain, R-Ariz., said “obviously” he was concerned about the cuts to the Defense Department, but nonetheless would support the deficit reduction package, which he called a “success.”

Sen. Joseph Lieberman, I-Conn., was also concerned about the potential defense cuts. “I’m trying to balance the greater good of the agreement avoiding default, cutting spending against the risk if the trigger is actually pulled.”

Noticeably absent from the debt ceiling legislation are economic policies to help boost the fragile economy. It also doesn’t touch reforming the complicated tax code or entitlements, which are the drivers of the federal spending. Many Democratic senators were hopeful that the new 12 member joint committee will consider a wide range of subsidies as ways to look for revenues.

“This doesn’t get us to the core problem of how do we take on tax reform and entitlements,” said Sen. Mark Warner, D-Va., who was also a member of the Senate “Gang of Six” that proposed a comprehensive deficit reduction plan. “I know the parties worked in good faith against a tough deadline. It doesn’t get us to the long term solution.” 

The majority of the budget negotiations revolved around deficit cuts but the immediate impact to the economy was taken into consideration as well, said Republican Sen. Scott Brown of Massachusetts. “Obviously when you are making cuts, you are concerned about the economy,” Brown said. “I think the economic impacts would be much worse if we do nothing.”

Obama has come under sharp criticism from liberal lawmakers, special interest groups and columnists for bending to conservative pressure to support deep government spending cuts that could be a further drag on the economy, at a time of miniscule growth and stubbornly high unemployment. New York Times columnist Paul Krugman today charged Obama with “abject surrender” for going along with big spending cuts but no increase in revenue.

Liberals argue that slashing government spending during a serious economic downturn neither helps the economy or helps improve the budget balance in the short run. Moreover, the economy will suffer major fiscal contraction when the unemployment insurance extension and payroll tax cuts both expire at the end of the year, while states are already feeling the pain as the federal stimulus program runs out.

William Galston, an economist with the Brookings Institution, said that the spending cuts Obama signed off are likely to be at most a “modest net negative for the economy” in the short run, but will help modestly in the long term to stabilize the government’s fiscal policies.

“There’s this huge tension between the short-term and the long term,”  he said. “Everyone says you stimulate now [to boost the economy] and cut down the road, but a lot of Americans and lawmakers believe future cuts aren’t real cuts unless you see them in the here and now.”

While the deal is clearly a win for deficit hawks, this isn’t as bad as some liberals are complaining. Obama’s constant  caving gave the final package bad optics. But the first $1 trillion of savings includes military in the mix in a fair proportion – not bad from a 'progressive’ point of view as long as it leaves Social Security and Medicare for seniors alone.

Administration officials said today that the deal was structured in a way to minimize the adverse impact of the cuts this year and next, while the economy continues to struggle to recover and unemployment is stuck at 9.2 percent. According to a Congressional Budget Office analysis released today, deficit reduction totaling only $21 billion in 2012 and a minimum of $42 billion in 2013, a small fraction of the $13 trillion annual U.S. economy.

“The administration did try very hard to limit the cuts that kicked in 2012 and even 2013 out of fear of what that would do to the economy,” said James R. Horney, director of the left-leaning federal policy at the Center on Budget and Policy Priorities. “I wish that it had been possible to go the other direction and actually decrease the deficit some now and next year and maybe even in 2013, in ways that would really boost the economy.”

Conservatives see proposals for more deficit spending or tax increases differently. “The tax increases the Left now wants will merely kill jobs by reducing business-risk taking and capital formation,” said Stuart Butler of the conservative Heritage Foundation. “And even the Keynesians on the Left can hardly argue from their perspective that raising taxes would be stimulative. Jobs will be created by reducing less efficient [in an economic sense] government spending and thereby allowing that money to be put into the pool of liquid capital and invested in more productive, job creating enterprises. 

Obama’s only real victory after months of bruising negotiations with House Speaker John Boehner, R-Ohio, and Senate Minority Leader Mitch McConnell, R-Ky., was the assurance that the debt limit  would be extended well past next year’s presidential and congressional elections. The administration balked at a Republican demand to hold two separate votes to raise the debt ceiling, this year and next, saying it would be political lunacy during a presidential campaign and would keep the economy in a perpetual state of uncertainty. 

Washington Editor and D.C. Bureau Chief Eric Pianin is a veteran journalist who has covered the federal government, congressional budget and tax issues, and national politics. He spent over 25 years at The Washington Post.