United States | The debt ceiling is raised, in the middle of a political crisis

A last-minute agreement to buy time

October 25, 2013

A scene that is beginning to be repeated: During a countdown, on the verge of taking the US to a default, because of reaching the legally allowed upper limit of issuing debt, Democrats and Republicans arrive at a precarious agreement that kicks the discussion on the debt ceiling up to February 7. Yesterday, hours before reaching the deadline indicated by the US Treasury, that had reported that, beginning today, it would not have sufficient funds to deal with its debts, if the debt ceiling were not expanded, the Senate first, and the House of Representatives afterwards, approved a law that momentarily distances the Obama administration from the risk of a default. The agreement also reversed the partial "shut-down" of the administration, that had taken place since October 1, that suspended the employment of almost 800,000 workers for two weeks as a result of intense disputes between Democrats and Republicans, on which groups’ funds to cut. The law approves funding the government until January 15.

Despite the agreement reached, there will be no end of harsh consequences. As several analysts have indicated, the paralysis of the last two weeks, and the growing tension in which the agreement is being reached, leaves its effects on an economy with very precarious bases, because of the effects of the crisis that began in 2007. The shut down of the administration cut no less than 20 billion dollars in direct public spending and in related activities, that are going to reduce the growth of the economy momentarily. The uncertainty regarding the debt, had as an effect, limiting still further the already sparse credits. On the other hand, although some months are being gained for arriving at a basic agreement on fiscal strategy and expenditure, the difficulties in order to reach this temporary solution do not arouse optimism about the possibilities of achieving it before February 7. A result, just as important, is that the uncertainty could limit consumer spending and business activity, at a key time like the year-end vacation period.

Those who are paying the highest costs for the agreement achieved are the Republican leaders located in the "center," headed by John Boehner. During recent weeks, they refused to negotiate and led to the government shut down, spurred on by the pressure from the most recalcitrant groups of the Republican Party, the minority faction of the extreme right, the Tea Party. These people were seeking, at any cost, to impose a reduction in the health plan pushed by Obama in 2010, known as "Obamacare" (that was subsidizing health coverage for those who are not covered, although within the frameworks of the system of private benefits, that began to operate on October 1, the same day as the government shut down), as well as in other spending items, as a condition for allowing raising the debt ceiling. Although it is a matter of a minority group within the party, it has been gaining influence in the local committees, by replacing the leaders branded as "conciliators." Most recently, the tendency to agree with the Democratic leaders was the argument wielded to replace the "centrist" – read inclined to arrive at an agreement that would avoid political paralysis – Republican leaders by others related to the Tea Party. The fear of a widespread "beheading" because of an agreement that was seen as extremely concessive to Obama, forced groups from the center, subjected to a double pressure, from the groups of the far right of their own party, on the one hand, and the Democrats, on the other, to present an alternative, But the agreement reached does not represent big concessions by the Obama administration. It only conceded on the point of authorizing an audit of income on those who receive subsidies for health insurance. Furthermore, the automatic reductions of public spending that began to be in force in March in different areas (the so-called "sequestration") and that will be intensified in January, that Obama’s administration was trying, unsuccessfully, to reverse, were not reversed. These will be part of negotiations up to the beginning of 2014. Aside from these points, the Republicans accepted the reopening of the government and the extension of the debt ceiling, without seeking to impose more conditions. They backed down too much to pay the price for snubbing the demands of the most extreme groups, which The New York Times defined as a "Republican surrender," and the Financial Times as a "self-inflicted blow" of the Republicans. As a whole, the Republican Party is suffering a severe fall in the opinion polls, and, having been subjected to pressure from the Tea Party Caucus, which represents less than 20% of the Republican legislators, it has been severely questioned in its potential as a governing party. Although, most recently, the Tea Party was defeated in its extreme position of leading the entire Republican Party to fight for imposing, at all costs, the cut in the health plan, the voting indicated the reluctance of a big group of Republicans: 18 Senators and 144 members of the House of Representatives opposed approval yesterday. Senator Ted Cruz, a Tea Party representative, comes out of this crisis winning still more influence among the Republican rank and file, despite having finally backed down from his position of blocking the agreement. Facing the negotiations of the coming months, everything suggests that the internal disputes among the Republicans will tend to break out again, even with a threat of break-ups.

Obama looks like a victor in the arm wrestling, having managed to impose the continuation of Obamacare. But the price of this arm wrestling has been to increase, on the worldwide level, the questionings of US leadership. China has come out in recent days to set out the need to build a "de-americanized" world, pointing out, as a critical point, the excessive reliance on the dollar (although any country could hardly cut immediately its excessive dependency on that currency as a reserve). And the Fitch rating agency has again threatened to lower the rating of US debt, even though a temporary agreement was reached, because of the uncertainty that the dispute between the parties is creating.

Although the agreement reopens the government and extends the possibility of indebtedness, and it allowed Obama’s administration to get, for the first time, a broad victory that did not depend on big concessions on his part, political dynamics persist, that will continue pushing towards the limitation of the US government’s public spending. The automatic cuts in spending continue in force, and it is anticipated that they will reduce spending by 19 billion dollars for the budget for this year and for 2014. And, in a few months, the shocks will reappear between Republicans and Democrats, to negotiate the budget strategy, that in terms of the current debate means where and how cuts are to be made – or the revenue is raised with new taxes – and no new measures to boost the economy. Economic growth will continue to be very dependent, then, on the effectiveness of the monetary stimulus measures that the Federal Reserve, the US central bank, is carrying out.