WASHINGTON—Republicans and Democrats in Congress have reached an agreement with President Barack Obama to raise the limit on US borrowing and forestall an unprecedented American default, marking the start in the final chapter of one of the nastiest and divisive episodes in recent American political history.
Tuesday is the deadline to avoid a US default on payments to investors in US Treasury bonds, recipients of Social Security pension checks, those relying on military veterans benefits and businesses that do work for the government.
If approved, the compromise would presumably preserve America’s sterling credit rating, reassure investors in financial markets across the globe and possibly reverse the losses that had spread across Wall Street in recent days as the threat of a default grew.
Rank and file lawmakers are expected to review the package, and no votes are expected in either house of Congress until Monday at the earliest.
Shortly after Senate Majority Leader Harry Reid and his Republican counterpart, Minority Leader Mitchell McConnell, endorsed the plan on the Senate floor, Obama went to the White House press room to add his support for the deal.
The compromise meets one of Obama’s key demands, raising borrowing power sufficiently to keep the partisan poison pill from returning to the national agenda until after the 2012 election. But the deal does not include any tax increases that the president had pressed hard for to include.
Speaker John Boehner, in a conference call with Republican members of the lower chamber, said the deal was a good one that met the demands of all Republicans.
Cloud lifted
Bowing to the still unknown outcome of congressional action, Obama said important votes remained to be taken, even as he noted that leaders of both parties in both houses of Congress had agreed to a plan that would initially cut about $1 trillion from US spending—“the lowest level of domestic spending since Dwight Eisenhower was president” in the 1950s.
“Is this the deal I would have preferred,” Obama asked, answering his own question with one word. “No.”
But he said: “Most importantly, it will allow us to avoid default and end the crisis that Washington imposed on the rest of America. And it will allow us to lift the cloud of doubt and uncertainty” that has hung above the United States for weeks.
And not just America: World markets from Asia to Europe showed their relief immediately as stocks jumped. On Wall Street, US stock futures surged.
Obama and many economists and financial experts predicted global chaos and plunging stock markets had no deal been reached by midnight Tuesday.
New debt limit
The broadest outlines of the emerging plan—a deal that involved deep negotiations between McConnell and Vice President Joe Biden—would raise the federal debt limit in two stages by at least $2.2 trillion, enough to tide the US Treasury over until after the 2012 elections.
Big cuts in government spending would be phased in over a decade. Thousands of programs—the Park Service, Internal Revenue Service and Department of Labor accounts among them—could be trimmed to levels last seen years ago.
No benefit cuts were envisioned for the Social Security pension system or Medicare, the federal program that provides health-care payments to the elderly. But other programs would be scoured for savings. Taxes would be unlikely to rise.
The first step would take place immediately, raising the debt limit by nearly $1 trillion and cutting spending by a slightly larger amount over a decade.
That would be followed by creation of a new bipartisan congressional committee that would have until the end of November to recommend $1.8 trillion or more in deficit cuts, targeting benefit programs such as Medicare, Medicaid and Social Security, or overhauling the tax code.
Second increase
Those deficit cuts would allow a second increase in the debt limit, which would be needed by early next year.
If the joint congressional committee failed to reach its $1.8-trillion target cut, or Congress failed to approve its recommendations by the end of 2011, lawmakers would then have to vote on a proposed constitutional balanced budget amendment.
If that amendment failed to pass, automatic spending cuts totaling $1.2 trillion would automatically take effect, and the debt limit would rise by an identical amount.
Social Security, Medicaid and food stamps would be exempt from the automatic cuts, but payments to doctors, nursing homes and other Medicare providers could be trimmed, as could subsidies to insurance companies that offer an alternative to government-run Medicare.
Any agreement will have to be passed by the Democratic-controlled Senate, which was seen as assured, and Republican-controlled House, which still could face a major tussle, before going to the White House for Obama’s signature.
Congress on standby
With precious little time remaining, both chambers had been on standby throughout Sunday.
Some Republicans were said to still be balking over proposed cuts in defense spending. It also was unclear how the 87 new House members, voted in with support from the low-tax, small-government Tea Party wing of the Republican Party, would vote.
But it was believed that both Speaker Boehner and Senate Majority Leader Reid felt certain they could garner sufficient votes.
The coming days will be clogged with statements from both Republicans, especially the Tea Party caucus, and Democrats as they try to convince their constituencies that they held firm and won the day in the bitter divide over how the government operates and what it owes to its citizens.
Impact of impasse
While America may have escaped the debt limit showdown with its credit rating intact, the US government may not be so lucky with its reputation.
The bitterness, division and dysfunction that resounded around the world in recent weeks have done more than just fuel a perception that Washington is approaching Japan-like levels of political gridlock.
Among foreign leaders and in global markets, the impasse has eroded America’s already diminishing aura as the world’s economic haven and the sole country with the power to lead the rest of the world out of financial crisis and recession.
It has chipped away at the global authority of President Obama, who was celebrated abroad when he came to office as a man who would end an era of US unilateralism.
Now the topic of discussion in other capitals is whether the Age of Obama is giving way to an Age of Austerity, one that will inevitably reduce America’s influence internationally.
But the brush with default has added a new dimension.
It has left America’s creditors and allies alike wondering what had changed in US politics that a significant part of the country’s political elite was suddenly willing to risk the nation’s reputation as the safest place for the rest of the world to invest.
It raised questions about whether America now faces brinkmanship over a variety of issues between an emboldened conservative movement and a president whose authority is under challenge.
And for all the talk on the Right about “American exceptionalism,” especially among members of the Tea Party, it put doubts in the minds of many about whether America’s military and economic dominance is something the country is still willing to pay for—and will always survive.
No more safety net
Many inside the White House and Congress also question whether the United States can afford to play its traditional role as the lender and spender of last resort in global financial crises.
The idea of putting together a global package to spur the world economy—as Obama did just two years ago in London, with European and Chinese help—seems to be a huge stretch in today’s environment of austerity.
As Jeffrey Garten, a professor at the Yale School of Management and the author of several books about American power in the era of globalization, puts it: “The lesson of the debt limit crisis is that if there is another financial calamity, we’re operating without a safety net. Get used to it.” Reports from AP and New York Times News Service