2011 budget crisis in the United States

The 2011 fiscal crisis in the United States in the summer of 2011 was the political question of whether the federal debt ceiling should be increased or eliminated entirely. The trigger for the crisis was, on the one hand, the sharp rise in American national debt due to government intervention to avert a recession after the financial crisis , and, on the other hand, the different majorities in the House of Representatives and in the Senate . The Treasury Department said that if the debt ceiling were not raised, the United States could become insolvent .

background

The development of the debt limit 1981–2010.

Under the Constitution of 1787 , Congress , the bicameral federal legislature, has sole authority to borrow on behalf of the United States. From the founding of the state to 1917, this was done as required by means of legislative resolutions that approved each loan individually. In order to be able to flexibly finance the participation of the United States in World War I , the procedure was changed with the Second Liberty Bond Act 1917. Under this law, a general nominal debt ceiling was set up to which the Treasury Department could borrow. In other laws in 1939 and 1941 the Treasury Department was empowered to take out the loans within the annual budget approved by Congress which were necessary to finance almost all government tasks and which, in their total amount, did not exceed a nominal debt limit. This debt ceiling has been raised regularly by Congress, in 77 cases over the past 50 years, most recently on February 12, 2010 from $ 12.4 trillion to $ 14.3 trillion (about 97% of GDP ).

According to forecasts by the Ministry of Finance , this limit would have been exhausted on August 2, 2011. Given the leading role of the United States in world trade and in the global financial markets , the Council on Foreign Relations expected in May 2011 far-reaching consequences if the debt ceiling were not increased. The trigger for the current budget deficit, which is causing continued borrowing, is a period of economic crisis in the United States that has persisted since the beginning of the financial crisis in 2007 and after the official end of the recession in June 2009. It leads to significantly lower tax revenues and higher social spending than expected. At the same time, the US federal government, in coordination with the central bank, has taken a number of fiscal and monetary policy measures aimed at accelerating economic growth.

In the last House election , Republicans got a majority, while Democrats continued to hold a majority in the Senate. Since the approval of both chambers of Congress and the President is required for raising the debt ceiling, as is the case for all federal laws, this opportunity will be used for various political positions of the two parties and for declared and suspected candidates for the 2012 presidential election .

Political positions

John Boehner (Republican Party), Speaker of the House of Representatives

Barack Obama (Democratic Party), President of the United States

On the Republican side in the House of Representatives, led by Speaker John Boehner , a reduction in the budget deficit primarily through significant cuts in government spending was cited as a condition for their approval of raising the debt ceiling. Interventions in the social security systems such as Medicare , Medicaid and Social Security were expressly meant, which together account for around 43% of expenditure. They strictly rejected a tax increase.

Among the Republican congressmen and senators there is also a group of supporters of the Tea Party , a populist - right-wing libertarian movement that advocates strict fiscal policy and fundamentally rejects an increase in the debt ceiling. These include Senators Jim DeMint , Rand Paul, and Mike Lee, and Congressmen Michele Bachmann , Ron Paul, and Allen West . In a proposal called Cut, Cap, and Balance , they called for government spending to be reduced by US $ 111 billion in the coming fiscal year, a legal limit to total spending to 19.9% of gross domestic product and a constitutional amendment to ban further debt. In return, the debt ceiling should be increased one last time by the US $ 2.4 trillion demanded by President Obama. The House of Representatives passed a majority vote on the proposal on July 19, 2011, but was postponed indefinitely by the Senate on July 22, 2011.

In contrast, there were the Democrats in the House of Representatives and the Democratic majority in the Senate under the political leadership of President Obama . The Democrats called for a short-term increase in the debt ceiling with a simultaneous reduction in government spending and an increase in some taxes, which is moderate compared to the Republican proposals. In particular, the aim was to expire tax cuts made under previous President George W. Bush .

The positions had become increasingly hardened during the conflict. Observers noted that the Republicans were increasingly concerned with harming President Obama and getting him out of office as soon as possible.

The debate was further complicated by an opinion advocated by legal scholars such as Ronald Dworkin , Jack Balkin and Garrett Epps that, according to a clause of the 14th Amendment to the Constitution, the debt ceiling is unconstitutional and therefore the Treasury does not have to adhere to it. The background to this is that Congress has already authorized the expenditure that is to be financed with the additional borrowing via the budget laws and the federal government is obliged to implement them. Former President Bill Clinton endorsed this view by saying it would be “crazy” if Congress were allowed to vote twice on whether to pay for expenses that have already been approved. The Treasury Department, however, does not share the view that it can ignore the debt ceiling for constitutional reasons.

Causes of the budget crisis

The years of the Bill Clinton administration (1993–2001) were marked by great successes in restructuring public finances. In the past four years, there have even been budget surpluses. The US began to reduce its debt. The American public speculated that the US could get rid of its debts completely. An unusually long economic boom and the pursuit of a balanced budget made this success possible. The tide turned in George W. Bush's first year in office . The terrorist attacks of September 11, 2001 were followed by the ongoing wars in Afghanistan and Iraq . According to economist Joseph E. Stiglitz, the total costs of the Iraq war and its follow-up measures alone amount to about 3 trillion dollars (according to a Zeit article from February 26, 2008). The 2007 financial crisis resulted in total costs of $ 11.9 trillion , according to the IMF , a large portion of which came from the US, which started the crisis.

Political agreement on August 2, 2011

On August 1, 2011, the House of Representatives agreed to a compromise to raise the debt ceiling by at least $ 2.1 trillion in two stages, coupled with cuts of more than $ 2.4 trillion over a ten-year period. On August 2, 2011, the Senate also approved the bill. This avoids the actual insolvency of the USA for the time being, which had been expected for this day without an increase in the debt ceiling.

Consequences of the political dispute and compromise of August 2, 2011

On August 2, 2011, the hardliners of the Republicans prevailed in a compromise between the parties to the dispute. The middle class and poor sections of the population bore the brunt of the impending spending cuts . Republicans prevented tax hikes that would hit the wealthy . The purchasing power of the broader population was thus decisively reduced and domestic demand weakened.

During the blockade of the Tea Party movement in the debt dispute on July 29, 2011, the main believer China accused the US of being held hostage by irresponsible politicians . Washington should better show a global sense of responsibility.

On August 6, 2011, China violently attacked the USA because of the current debt policy. Beijing also questioned the role of the dollar as the global reserve currency . China is the USA's largest creditor. The country has foreign exchange reserves of approximately $ 3.32 trillion and the number is rising. Around three quarters of this is invested in US dollars and a quarter in euros .

Hans-Peter Burghof , Professor of Economics at the University of Hohenheim, said that the image of the global economic order was fundamentally changing in these years. The decisive turning point was brought about by the financial crisis from 2007 , the climax of which was the bankruptcy of Lehman Brothers . That was when the financial crisis began on the US real estate market. The image of the USA as a financial superpower was destroyed.

Credit Downgrade

On Friday, August 5, 2011, Standard & Poor’s (S&P) downgraded the United States from its top credit rating of “AAA” to “AA +” for the first time since 1941 . As a result, government borrowing costs were expected to rise by up to $ 100 billion. The rating agency justified this step with the insufficient savings plans of the US government. S&P also viewed the agreement between Congress and government on additional savings as doubtful and the outlook for the next 12 to 18 months as negative. The US Treasury Department criticized the downgrade and complained that it was based on a calculation error.

Possible consequences of default

If the federal government cannot take out any further loans to meet its obligations, this also affects interest and loan repayments to existing lenders who can no longer be serviced due to a lack of funds. As a result, according to the former chief economist of the International Monetary Fund , Simon Johnson , a panic in the financial markets and further negative consequences for economic growth in the United States could be expected.

In the opinion of former Treasury Secretary Lawrence Summers , a default would lead to sensitive interest rate premiums on bonds of the United States, which means that borrowing would only be possible at significantly higher costs after a subsequent increase in the debt ceiling. At the same time, he assumes that investors would flee American bonds, which would make refinancing due loans even more difficult, if not impossible. Similar effects were seen in Greece , where the severe downgrading of Greece's solvency led to record interest rates on Greek bonds.

However, the yields on US government bonds, as with German government bonds, have fallen significantly, because states like the USA and Germany are seen as safe havens for investors in times of crisis. The yield on US government bonds (such as German government bonds) is below the inflation rate . A negative real interest rate , i.e. the rate of return adjusted for the inflation rate , means that the creditor pays to be able to lend money to these countries, according to a comment in the Frankfurter Allgemeine Zeitung . The insurance premiums against default of US government bonds (prices for credit default swaps ) were half as high in September 2011 as those for government bonds from Germany or Great Britain.

chronology

February 12, 2010 - The 111th Congress , with a majority of Democrats in both chambers, passes a debt ceiling increase to $ 14.3 trillion.
November 2, 2010 - In the House of Representatives election, the Republicans win 63 seats from the Democrats and have a majority in the chamber with 242 to 193 seats.
December 1, 2010 - The Bowles-Simpson Commission , a special committee to develop financial reform made up of representatives from the House, Senate and President, adopts its joint recommendation. The recommendation is not supported by the necessary majority.
January 6, April 4 and May 2, 2011 - Finance Minister Geithner asks Congress in three letters to raise the debt ceiling, otherwise there is a risk of insolvency.
May 16, 2011 - The debt ceiling has been reached. Due demands can be met for a short time by taking advantage of some emergency measures.
May 18, 2011 - Non-partisan talks between six senior senators to cut the budget deficit fail after Tom Coburn cancels.
May 24, 2011 - Vice President Joe Biden and four Democratic MPs attempt to continue talks with House Republican majority leader Eric Cantor and minority Republican whip Jon Kyl . The results should serve as a basis for negotiations between Obama, Boehner and other congressional politicians.
May 31, 2011 - A majority of the House of Representatives voted against a simple motion to increase the debt ceiling in a symbolic vote.
June 23, 2011 - Vice President Biden's negotiations break down due to disagreements over tax increases.
July 19, 2011 - The House of Representatives votes with a majority of 234 to 190 in favor of the cut-cap-and-balance bill, which provides for significant budget cuts, statutory restrictions on future spending and a constitutional ban on debt. 229 Republicans and 5 Democrats, 181 Democrats and 9 Republicans vote against.
July 22, 2011 - The Senate votes with a majority of 51 to 46 to postpone the bill passed by the House of Representatives for an indefinite period of time.
July 25, 2011 - In two consecutive televised speeches that evening, President Obama and House Speaker Boehner accused each other of blocking and uncompromising behavior. The speeches will be broadcast live nationwide on the four major national television networks NBC , ABC , CBS and Fox .
August 1, 2011 - President Obama announced an agreement. The House of Representatives agrees to a compromise to raise the debt ceiling by at least $ 2.1 trillion in two stages, coupled with cuts of more than $ 2.4 trillion over a ten-year period.
August 2, 2011 - The Senate also approves the bill. In the absence of an increase in the debt ceiling, the actual default of the United States was expected on that date.
August 5, 2011 - The rating agency Standard & Poor’s downgraded the long-term creditworthiness of the United States from the top rating “AAA” to “AA +”.

Later developments

In mid-December 2011, the US House of Representatives passed a budget law in a bipartisan compromise and thus once again ensured solvency in the short term.

On December 31, 2012, the United States reached the permitted debt level of 16.390 billion US dollars (= 16.39 trillion US dollars). From then on, the government's solvency was for a time guaranteed by special measures such as the suspension of state contributions to the pension fund.

Another US debt crisis broke out in October 2013.

Individual evidence

↑ Get the Facts: Raising the Debt Limit. United States Department of the Treasury , accessed July 24, 2011 .

↑ ^a ^b Reymer Klüver: Without you . In: Süddeutsche Zeitung . July 28, 2011, p. 3 .

↑ Obama signs debt limit-paygo bill into law. Reuters, accessed July 24, 2011 .

↑ ^a ^b Masters, Jonathan: US Debt Ceiling: Costs and Consequences. In: Council on Foreign Relations . May 17, 2011, accessed July 27, 2011 .

^ Business Cycle Dating Committee, National Bureau of Economic Research , September 20, 2010 press release

↑ House passes GOP debt measure; Obama praises compromise plan. (No longer available online.) CNN, July 19, 2011, archived from the original on July 24, 2011 ; accessed on July 24, 2011 (English). Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice.

↑ Democrats mutiny against possible compromise. Welt Online, July 22, 2011, accessed July 24, 2011 .

↑ Scheme, stonewall and fulminate. In: The Economist. July 21, 2011, accessed July 24, 2011 .

↑ Ronald Dworkin: Can Obama Extend the Debt Ceiling on His Own? In: The New York Review of Books . July 29, 2011, accessed July 30, 2011 .

↑ Exclusive Bill Clinton Interview: I Would Use Constitutional Option To Raise Debt Ceiling And "Force The Courts To Stop Me". In: The National Memo. July 19, 2011, accessed July 24, 2011 .

↑ George Madison: Treasury General Counsel George Madison Responds to New York Times Op-Ed on 14th Amendment. United States Department of the Treasury, July 8, 2011, accessed July 24, 2011 .

↑ National debt of the USA on staatsverschuldung.de , accessed on August 6, 2011

^ Zeit article on Joseph Stiglitz from February 26, 2008

↑ IMF increases cost of financial crisis forecast to $ 11.9 trillion

↑ ^a ^b Debt plan passes the House of Representatives of the USA focus.de, August 2, 2011

↑ ^a ^b US debt compromise is under the roof

↑ Obama signs debt law and comes under criticism - Tough wrestling over debt limit - Dissatisfaction with government is growing ( page no longer available , search in web archives ) Info: The link was automatically marked as defective. Please check the link according to the instructions and then remove this notice. Article by ZDFheute from August 2, 2011.@1@ 2Template: Toter Link / www.heute.de

↑ China warns USA of "big mess" ( page no longer available , search in web archives ) Info: The link was automatically marked as defective. Please check the link according to the instructions and then remove this notice. , Article by ZDFheute from July 29, 2011.@1@ 2Template: Toter Link / www.heute.de