Originally Published 2011-08-04 00:00:00 Published on Aug 04, 2011
The negotiations leading to the compromise legislation in the US Congress revealed two interesting trends. One, the increasing influence of the Tea Party Caucus in Republican politics and by extension in the American political system. Second, the absence of effective Presidential leadership in the debt-ceiling debate.
US Debt Crisis: Viable Recovery Plan Still Missing
On 2nd August afternoon, with barely a few hours left to avoid the debt default and the subsequent backlash, President Barack Obama signed into law the $16.7 trillion debt bill, marking the end of an acrimonious legislative session in the Capitol. An intense partisan fight between the Republicans and the Democrats nearly led the US into debt default. The situation arose because of the debt ceiling mandated by the American Constitution. According to Article 1(8) of the Constitution, the power to borrow money on the credit of the United States is vested in the Congress. Till 1917, the Congress used to authorise every single federal debt. This became a hassle due to the increasing requirement of funds during the First World War. Therefore, the Congress enacted the Second Liberty Bond Act of 1917 to set a statutory debt limit, enabling the Treasury to borrow money without specific Congressional authorization. In 1939, the Congress set up a comprehensive debt limit, permitting the executive to use its discretion in borrowing. Since then, the Congress has regularly raised the debt ceiling, most recently in February 2010, when it set the limit at $14.29 trillion.

The debt ceiling debate laid bare the fault-lines in Beltway politics, which has intensified in the wake of the financial crisis. While there was a broad agreement regarding the increasingly unwieldy federal debt and the importance of tackling it, the Democrats and the Republicans hold diametrically opposite ways to achieve the reduction. The Democrats prefer to raise money through increased taxation while the Republicans want the debt to be reined in by a reduction in federal spending.

With the latest debt deal, the Republicans appear to have the upper hand since the proposed reductions outlined in the bill are to be realized through spending cuts, without any tax increases. The bill authorises a cut of nearly $917 billion between 2012 and 2021, primarily by capping discretionary spending. Entitlements like Medicare and Medicaid payouts have been left untouched. Interestingly, the bill has mandated the establishment of a 12-member bipartisan congressional committee-with equal Republican and Democratic representation from both the House and the Senate-to propose $1.5 trillion in additional deficit cuts by Thanksgiving Day. The reduction can be achieved by increasing taxes or by reducing government-spending, something that will surely reopen partisan battle-fronts. If the panel fails to conclude a deal by the deadline or if the Congress or the President refuses to ratify the proposals, then automatic cuts worth $1.2 trillion would be implemented, affecting a host of programmes, ranging from defence allocations to farm subsidies.

The negotiations leading to the compromise legislation in the Congress revealed two interesting trends. One was the increasing influence of the Tea Party Caucus in Republican politics and by extension in the American political system. Second was the absence of effective Presidential leadership in the debt-ceiling debate. The Tea Party Caucus set the agenda and ensured that most of their demands were met in the final bill. In fact, the first two versions of the debt bill, approved by the House on 19th and 27th July (both were eventually rejected by the Senate) reflected the influence of the Tea Party and their sustained intransigence. Both bills included a provision to constitutionally mandate that the federal budgets will henceforth be balanced and envisaged deficit management solely through spending cuts. Rejecting all overtures of compromise, they forced Speaker John Boehner to abandon his negotiations with President Obama in framing a compromise bill which would have cut deficits by $4 trillion (instead of $2.4 trillion proposed by the present law) because the bill contained provisions for raising taxes to the tune of $800 billion. The House GOP freshmen thus set the agenda for the debate, forced the Republican leadership to accede to their demands and made sure that ultimately the Democrats including the President accepted a plan, which included a first-ever cap on discretionary spending and no tax increases. Thus, "the new congressmen elected in 2010 dramatically shifted the debate from how much more to spend to how much shall be cut." After the bruising debate, many Republican legislators appear to be worried about the impact of the Tea Party in their re-election bids. Alienating the Tea Party would mean losing out on an energetic section of the Republican base while aligning with them could lead to an exodus of independent voters, who were appalled by the 'my way or the highway tactics' adopted by the Tea Party Caucus in the debt-ceiling debate.

The debt-debate brought into focus President Obama's handling of a crisis situation. The President was unable to drive and shape the debate and appeared to be lacking a real plan throughout the crisis. From early June, at least 10 different debt-reduction plans were floated around in Washington but surprisingly none came from the White House. After the talks with Speaker Boehner broke down, Obama said that he felt like a "forlorn bride, left at the altar". However, no alternative plans were forthcoming from the White House. Secondly, Obama did precious little to counter the Tea Party assault. As pointed out by Tom Harkin, the Democratic Senator from Iowa, at the time of the crisis Obama failed to exert executive leadership and "went wobbly in the knees". Though the President repeatedly warned that he will not approve a debt-reduction plan which did not include tax increases, he eventually signed on a bill which did not include even a cent of revenue increase. A nationally televised address and three press conferences on the issue did not help the President in influencing the course of the debate in the Congress. Such a deal is also likely to alienate the President's supporters on the political Left. Many senior Democrats like Illinois Senator Dick Durbin were upset by the fact that the President proved to be an inefficient negotiator and criticized the fact that Obama ruled out the use of 14th amendment of the Constitution to raise the debt ceiling, even as a negotiation tool. The amendment stipulates that the "validity of national debt incurred by the US shall not be questioned". Former President Bill Clinton, who fought and won against the Republican-led Congress in a 1995-96 Treasury shutdown, was forceful in his support for a unilateral debt-ceiling hike by Obama under the 14th amendment, if the Congress remained intransigent. Obama disagreed and by the time the debate finished, he looked indecisive and uncertain while his approval ratings plunged to an anaemic 40 percent.

In spite of the present compromise plan, the debt fight is expected to continue through Thanksgiving, when the bipartisan panel's recommendations on deficit cuts are due. Moreover, the current economic condition of the United States does not inspire much confidence. The United States is sharply divided over ideological lines. The approval ratings of the Congress and the President have plummeted. A double dip recession is lurking in the shadows. And yet, the country is unable to agree on a viable plan of recovery.

(Ajish P Joy is an Associate Fellow at Observer Research Foundation)
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.