April 27, 2011
The Debt Ceiling: Who's Holding Whom Hostage?
The big question about the federal government's little debt problem can be boiled down to this: How much time do we have? Some say the problem is years away; others contend the problem is imminent but manageable; and another group believes the problem is already upon us and requires immediate action necessitating painful spending cuts.
The group that believes America's fiscal problems are far off in the future is large and diverse. The core of this group is the Democratic Party, the very people who gave America our current trillion-dollar deficits. A smaller cohort of this group consists of those who simply don't care about America's solvency and some who even want to replace our economic system, such as Marxist filmmaker Michael Moore who delivered a speech in Wisconsin asserting that "America is not broke."
Moore's assertion is too ludicrous to spend any time refuting -- but it is made even by certain "intellectuals" on the left. In his column "Dumbing Deficits Down," Paul Krugman, the godfather of American sovereign debt, writes:
To put this in context, you have to realize two things about the fiscal state of America. First, the nation is not, in fact, "broke." The federal government is having no trouble raising money, and the price of that money -- the interest rate on federal borrowing -- is very low by historical standards. So there's no need to scramble to slash spending now now now; we can and should be willing to spend now if it will produce savings in the long run. [Emphasis added.]
(So, we don't need to be concerned about the size of our national debt because creditors are still willing to loan us money, despite the lousy interest rates. But will the size of our debt matter if our creditors stop loaning us money? Will we be broke then? Mr. Krugman also fails to mention that the "federal government is having no trouble [printing] money, and the price of that money" is nothing.)
Moore, Krugman et al. are "debt crisis deniers." An effective antidote for these deniers is Harvard don Niall Ferguson. In "Today's Keynesians have learnt nothing" at The Financial Times, Ferguson writes:
The anti-Keynesians point out that bond market sell-offs are seldom gradual. All it takes is one piece of bad news -- a credit rating downgrade, for example -- to trigger a sell-off. And it is not just inflation that bond investors fear. Foreign holders of US debt -- and they account for 47 per cent of the federal debt in public hands -- worry about some kind of future default.
Rep. Paul Ryan (R-WI) is a leader of the second group: those who believe we do in fact have a deficit problem but think we can fix it if we start soon. While Ryan's budget is far superior to Obama's -- as economist John Taylor demonstrates in "Obama's Permanent Spending Binge" in The Wall Street Journal -- it still doesn't get us to balance for years. And it assumes that future Congresses will abide by his blueprint. But no Congress can bind a future Congress. The only budgets a Congress has any control over are the budgets it passes each year. As sober and serious as Mr. Ryan is, his budget racks up more debt.
Sterner stuff comes from Sen. Rand Paul, who proposes cutting $500 billion right away. Do that for three consecutive years and we're close to the deficit Democrats inherited in 2007. But Rand Paul's plans don't stand much of a chance of getting through the Democrat Senate and being signed by the president.
The only real leverage Republicans currently have is with the debt ceiling. Which brings us to our third group: those who think the deficit crisis is here and now. Andrew McCarthy has a terrific blog, "Don't raise the debt ceiling," in The Corner at NRO, and it exposes the mendacious blather of Treasury Sec. Timothy Geithner. It turns out that refusing to raise the debt ceiling does not mean automatic default.
Now we're talking. But, if the debt ceiling must to be raised, it should be done in the smallest increments: just enough to tide the feds over for a month, or even a week. Raising the debt ceiling by tiny amounts would serve to keep the deficit before the American people, and help to educate the public about this issue. Forking over another trillion-dollar blank check to this spendthrift administration would be a huge failure. If the debt ceiling were not raised, Obama would have to "live within his means." That might be very salubrious for the tanking U.S. dollar.
A recent cartoon by Tom Toles in the Washington Post shows a housewife answering her door. Standing at the door is the Speaker of the House with a pistol in one hand and "debt ceiling" in the other. The housewife yells back at her husband (who represents America): "Honey! John Boehner is here to take you hostage again."
Toles' message is that of the Democrats: To not raise the debt ceiling, to not go along with the Democrats' continual borrowing, is criminal. Borrowing is the right thing to do; debt is the natural order of things; any cut in spending is unconscionable.
But who's holding whom hostage? Aren't the American people, with their addiction to government goodies that they expect future generations to pay for, holding the Congress hostage? Give us our "free" stuff or we won't vote for you.
If America truly demands all this spending by the feds, then let's pay for it now. Let's raise taxes to cover it all. But to pay for our current spending with current revenue would require hiking taxes by around $1.645 trillion. That's the projected deficit for 2011, and it dwarfs this year's Individual Income Tax receipts, estimated to be $956B. Indeed, if we doubled this year's total on-budget receipts, an estimated $1.614 trillion, we still couldn't cover the deficit for 2011 (numbers from Table 1.1 and Table 2.1).
So with the current level of spending, if America were to abide by real pay-as-you-go financing (not the phony Pelosi kind), businesses would leave America in droves. As the economy crashed, folks would finally wise up and demand an end to the insane spending.
Regarding how much time America has, there's a fourth group: those who think it's already too late. They believe America can't avoid disaster nor save her currency, and there's one hugely painful adjustment coming. If one is truly in this camp, then it's past time to spend one's remaining dollars stockpiling ammo, canned goods, gold, non-hybrid seeds, etc. You might even move to Australia, if they'll have you.
But would you have read this far if you truly believed it's too late for America?
Jon N. Hall is a programmer/analyst from Kansas City.