– Senate approves debt-ceiling legislation (MarketWatch, Aug. 2, 2011):
WASHINGTON (MarketWatch) — Just hours before a potential default on the nation’s debt obligations, the Senate on Tuesday approved an increase to the U.S. debt ceiling that also reduces planned budget deficits, and President Barack Obama signed the legislation into law.
By a 74 to 26 vote, the Senate approved a proposal that increases the $14.3 trillion debt limit by up to $2.4 trillion in two stages, and by the Congressional Budget Office’s tally, reduces deficits by $2.1 trillion over a decade. Yet even with the cuts, the United States is projected to increase the national debt by $7 trillion or more over the same span.
“It may have been messy, it may have appeared to some like government wasn’t working, but in fact it was the opposite,” said Senate Minority Leader Mitch McConnell, the Kentucky Republican who was key to forming the legislation, shortly before the vote. “It was the will of the people working itself out, and it wasn’t meant to be pretty.”
The House of Representatives voted Monday to approve the bill, and just more than an hour after the Senate vote the president signed it.
Obama called it a “first step,” but said more action needed to be taken to bolster the economy.
“When Congress gets back from recess, I will urge them to immediately take some steps — bipartisan, common-sense steps — that will make a difference; that will create a climate where businesses can hire, where folks have more money in their pockets to spend, where people who are out of work can find good jobs,” he said.
Treasury Secretary Timothy Geithner told ABC’s “Good Morning America” that the deal will give “room” for the private sector to grow, because the near-term cuts are “very modest,” but the long-term savings are “very substantial.”
Geithner also said he wasn’t sure if the deal will help America avoid a downgrade of its triple-A credit rating. Standard & Poor’s and Moody’s Investors Service so far have kept mum in reaction to the bill. Fitch Ratings said it would keep its AAA stance.
“It’s not my judgment to make, and [the ratings agencies] have to make that judgment. But, you know, this is a … in some ways, a judgment on the capacity of Congress to act,” he commented.
John Taylor, a Stanford University professor and conservative economist, said the legislation marks a “very big shift” in spending.
David Rosenberg, chief economist and strategist at Gluskin Sheff, disagreed. “This is a historic bill? Waiting for a toothless commission to come up with hard decisions for the future? The deficit reduction of $2.4 trillion over the next 10 years falls well short of the $4 trillion that the rating agencies were looking for,” he wrote to clients.
J.P. Morgan analyst Michael Feroli said the deal would subtract about 0.3 percentage points from 2012 GDP growth. “This drag may appear fairly small, but it is on top of the substantial tightening that was already in place prior to the passage of the debt deal,” he added, as the payroll-tax holiday, emergency unemployment benefits, accelerated depreciation and increased transfer to the states all end.
The focus will turn to a so-called “super commission” — 12 lawmakers, drawn equally from both parties and both chambers, that will recommend further budget savings by Thanksgiving. If the commission can’t agree, or if Congress fails to enact their recommendations in December, then automatic cuts to defense and Medicare would be made.
The Dow Jones Industrial Average DJIA -2.19% finished sharply lower Tuesday, extending a losing streak to eight. Read full coverage of the trading action in Market Snapshot.
Stocks have dropped in part because of worries over the debt ceiling, but also due to disappointing U.S. economic data as well as fears over euro-zone debt.