1. News & Issues
You can opt-out at any time. Please refer to our privacy policy for contact information.

How the Debt Ceiling Debate Hurt America

Credit Rating Downgrade Follows Gridlock Over Debt Ceiling

By

Stocks Plunge As S&P Cuts U.S. Credit Rating To Negative

Stocks Plunge As S&P Cuts U.S. Credit Rating To Negative

Spencer Platt/Getty Images
Updated August 06, 2011

The contentious debt ceiling debate of 2011 resulted in the first-ever downgrade in the United States credit crating. Standard & Poor's said it reduced the nation's AAA score to AA+ on Aug. 5, 2011, because of the protracted debt ceiling debate and the wide chasm between the political parties in Congress, making good on its threat of a downgrade earlier in the year.

"We believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process," Standard & Poor's wrote.

See also: Debt Ceiling History

" ... The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy."

About the Debt Ceiling Debate

The U.S. Congress voted in the first two days of August 2011 to increase the nation's $14.294 trillion debt ceiling to avoid a potential default in what was the fourth increase of the mandatory borrowing cap in President Barack Obama's first term. The legislation was known as the Budget Control Act of 2011.

The bill was the result of months of political wrangling over raising the debt ceiling and reducing the federal deficit and the nation's growing debt. Lawmakers were bound by a deadline of Aug. 2, 2011, the date the U.S. Treasury expected the country's borrowing to hit the debt ceiling.

The contentiousness of the debate, over whether to raise taxes and the depth of spending cuts, was bemoaned by many in Congress and President Barack Obama. "It shouldn't take the risk of default - the risk of economic catastrophe - to get folks in this town to work together and do their jobs," Obama said after signing the bill into law.

Effect of Credit Downgrade

A downgrade from the AAA credit rating means it will cost the U.S. government and businesses more to borrow money and cause rates on home mortgages to increase, policymakers and experts. It also meant the credit market would tighten and, some economists feared, derail an economic recovery.

JPMorgan Chase & Co. said the credit rating downgrade would result in an estimated $100 billion more in the nation's borrowing costs every year, an amount that would be picked up by American taxpayers.

Blame for Both Parties in Debt Ceiling Debate

Standard & Poor's said both Republicans and Democrats were to blame in the debt ceiling debate, for agreeing on only "relatively modest savings on discretionary spending" while delegating to others bigger decisions on "more comprehensive measures."

The Budget Control Act of 2011 cuts only $2.2 trillion in federal spending over 10 years. The national debt at the time was $14.3 trillion.

"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics," Standard & Poor's said.

See also: Budget Deficit History

The credit agency appeared to criticize Republicans for not agreeing on higher taxes on some Americans. And it suggested Democrats were at fault for not being open to spending reductions in entitlement programs.

"It appears that for now, new revenues have dropped down on the menu of policy options," Standard & Poor's wrote. "In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability."

Reaction to Rating Downgrade

White House spokesman Jay Carney, in a prepared statement put out after the debt ceiling caused the credit rating downgrade, called on Congress be get serious about cutting the national debt.

"The President believes it is important that our elected leaders come together to strengthen our economy and put our nation on a stronger fiscal footing," Carney said.

"The bipartisan compromise on deficit reduction was an important step in the right direction. Yet, the path to getting there took too long and was at times too divisive. We must do better to make clear our nation's will, capacity and commitment to work together to tackle our major fiscal and economic challenges."

Carney was defensive of Obama, saying the president had repeatedly called for "substantial deficit reduction through both long-term entitlement changes and revenues through tax reform."

The Department of the Treasury claimed Standard & Poor's miscalculated the nation's debt level. A spokesman told several media outlets that: "A judgment flawed by a $2 trillion error speaks for itself."

©2014 About.com. All rights reserved.