United States

Efforts at compromise by the leadership of both parties—including closed-door negotiations led by Vice President Biden and a bipartisan attempt by the “Gang of Six” (three senators from each party)—repeatedly collapsed in partisan rancor. In July Obama and Republican Speaker of the House John A. Boehner, meeting privately, nearly reached agreement on a "grand bargain" that would have included trillions in spending cuts, changes to Medicare and Social Security, and tax reform. The deal fell through near the end of the month, however, when the two could not agree on the level of additional tax revenue to be generated. Media reports indicated that Boehner had agreed to tax revenue increases of $800 billion, but, when Obama asked for another $400 billion, Boehner nixed the deal. In any case, many believed that the speaker would have been unable to win sufficient support for the agreement from House Republicans, who remained adamantly opposed to tax hikes and had passed a bill requiring a cap on spending and a balanced budget.

Nevertheless, as the threat of default grew more imminent, there was increasing consensus in both parties that the debt ceiling should be raised. With a broad agreement seemingly out of reach, compromise appeared to hang on whether the ceiling would be increased in one step (which would extend the limit past the 2012 election) or two (which would raise the issue again sooner). Senate minority leader Mitch McConnell proposed a solution that would allow the president to raise the ceiling provided that two-thirds of both houses of Congress did not vote against that action (that is, not enough votes to override a presidential veto). Senate majority leader Harry Reid advanced a bill that removed tax increases from the equation.

Raising the debt ceiling, capping spending, and the efforts of the “super committee”

On July 31, just two days before the deadline, an agreement was reached by the White House and congressional leaders that called for an increase of about $2.4 trillion to the debt ceiling through November 2012, to be imposed in stages. The agreement provided for an immediate increase of $400 billion, with an additional $500 billion to come after September 2011. This combined initial increase of $900 billion would be offset by budget cuts of some $917 billion that would result from an immediate cap on domestic and defense spending. The deal, which did not provide for tax increases, also stipulated that both houses of Congress had to vote on an amendment to the Constitution requiring a balanced budget. The final bill was approved by the House of Representatives by a vote of 269–161 (with centrists from both parties largely voting for it, while many of those farther on the right and left voted against it) and by the Senate by a bipartisan vote of 74–26. Yet despite these efforts, on August 5 Standard & Poor’s, one of the three principal companies that advise investors on debt securities, downgraded the credit rating of the United States from the top level, AAA, to the next level, AA+.

The bill also created a congressional “super committee” tasked with recommending by the end of November 2011 the measures by which an additional $1.2 to $1.5 trillion would be cut from the deficit over a 10-year period. If the committee had agreed on a set of proposals and had those proposals been approved by Congress, the debt ceiling would have been raised by a commensurate amount. In the event, however, the super committee failed to arrive at a consensus plan, which, according to the stipulations of the bill, triggered some $1.2 trillion in across-the-board cuts (evenly divided between defense and nondefense spending) to be implemented in 2013.

Occupy Wall Street, withdrawal from Iraq, and slow economic recovery