No. 9: Government Shutdown

The national debt hit $14.9 trillion in 2011 and threatened to bring the government to a halt.  As long as the U.S. operated at a deficit, spending more than it was taking in, the government had to borrow — and how much it could borrow was limited by the debt ceiling, one of the biggest search terms of 2011.

Determining how much of a bill we should be allowed to amass for our children’s children became a major political priority — so much that politicians risked a government shutdown and a default while they experimented with the math, ultimately sparking a controversial downgrade to the U.S. credit rating.

By September 30, 2010, Congress was supposed to pass a budget for fiscal year 2011, which ran from October 2010 to September 2011.  A string of so-called continuing resolutions — legislation to fund government agencies and avoid a shutdown if a budget hadn’t been reached — kept things operating through early April.  On April 8, with just about an hour before a shutdown would begin, lawmakers agreed to a compromise to keep the  government open through the end of the fiscal year.

“We didn’t do it at this late hour for drama; we did it because it’s been very hard to arrive at this point,” Senator Harry Reid  (D-Nev.) said. But there was one hard choice lawmakers didn’t figure out: They passed a budget without voting to increase the debt ceiling. Despite hours of negotiations in closed rooms, President Obama refused to agree to the Republicans’ demands for steep spending cuts, and Republicans threatened to hold their Montblancs until the government defaulted.

Again, Americans were strung along until the last minute. On August 2, the deadline by which the U.S. would default on its debt if the ceiling wasn’t raised, lawmakers passed the Budget Control Act of 2011. It added $2.1 trillion in head space to the ceiling, but the law also called for discretionary spending caps to trim the deficit by $1 trillion over 10 years and created the United States Congress Joint Select Committee on Deficit Reduction, charged with finding $1.5 trillion more in cuts (or new revenue).

There weren’t immediate consequences to raising the debt ceiling, so why wait until the verge of default? Both sides thought the threat would bring the other to its senses. But politicians’ tactics and inability to work together was a disturbing glimpse into Washington political warfare.

The Obama administration dubbed the agreement “a win for the economy.” But Daniel Gross, Yahoo! Finance’s economics editor, cautions that “the impact is likely to be larger in the coming months on the markets, the economy, consumers, and taxpayers than on politics.”

Some of that impact hit about three days after the bill passed, when Standard & Poor’s downgraded the U.S. credit rating. And it’s not over yet. The bipartisan committee on deficit reduction — the “super-committee” — was ordered to provide a recommendation to reduce the debt by $1.2 trillion over 10 years. That recommendation was due by November 23, and was to be put to a vote by December 23. The committee said on November 21, however, that it could not reach an agreement. Without Congressional approval of a package, automatic cuts will start in 2013, split between defense and domestic spending.

The potential for a shutdown continues to reemerge: Dozens of federal agencies were reportedly preparing Thursday, December 15, for a partial shutdown of government operations, with a Friday deadline looming for lawmakers to reach an agreement on a spending measure to keep the government running and a bill to extend the payroll tax cut. Senate leaders were optimistic …

Elizabeth Trotta is a news and investing editor for Yahoo! Finance. Before joining Yahoo! in October 2010, she wrote for SmartMoney, and Investment Dealers’ Digest.