Once Again, Let's Not Increase the Debt Ceiling

Are our politicians all gutless wonders?

Almost two years ago, I suggested that the Congress not increase the debt ceiling.  The debt ceiling was increased.  No budgets were adopted.  Spending continued.  As of November 9, 2012 (this writing), the debt now stands at $16,245,318,820,569.34.  Worse yet, the debt and the prospect of more of it is weighing down the economy.  GDP growth remains very low, and consequently, federal government revenues are also lagging.  The recent presidential election suggests that we will see more of the same.

The Speaker of the House has proposed an extension of the current tax rates (and most or all of the current spending) for six months or so to give Congress and the president time to propose spending cuts and revamp the Internal Revenue Code to reduce credits and deductions and tax rates across the board, as was suggested by the Simpson-Bowles Commission (National Commission on Fiscal Responsibility and Reform) appointed by the president on February 18, 2010 and reporting to him.  The president, who never took any action on Simpson-Bowles, has indicated no deal unless rates on upper-income people can be raised.  This sounds like the argument that we have been hearing for too long now.  Another two years is too long to wait.  

There is a trump card: refuse to raise the debt ceiling.  Hold the government's feet to the fire and force an end to spending using borrowed money.  Another opportunity to do this will arise in a month or so.  Doing it would be a good idea for GDP growth and the general health of the economy.  But it could also be the trump card for an agreement to stick to a solution like Simpson-Bowles.

Keep in mind the fact that the "Budget Blueprint" prepared by Congressman Paul Ryan, chairman of the House Budget Committee, and passed by the House some time ago also calls for tax reform and gradual budget cuts similar to Simpson-Bowles.  If all spending and receipts outlined in these proposals are implemented by the House and Senate and are then signed by the president, spending will be reduced by about six trillion dollars, and the deficit will be reduced by about four trillion dollars over ten years.  Do you really believe that this will happen?  Even if it does, the federal government will continue to run deficits and add to the national debt for the next ten years, albeit at a slower rate than the present.  Perhaps we need a solution a lot more drastic in order to get a grip on federal spending and to stop adding to the debt immediately.

It so happens that there may be enough votes in the current House of Representatives to prevent an increase in the debt ceiling.  If the debt ceiling is not increased, there will be bigger spending cuts in the current (nonexistent) budget and the 2013 budget (assuming one is ever passed), and every budget after that, because we are very close to the debt ceiling.  If the debt ceiling is not increased, money cannot be spent that would raise the debt over that ceiling.  Deficit spending would end immediately.  Congress will be finally forced, at least for a little while, to allocate austerity rather than funding its favorite expenditures with borrowed money.

Since we have just had an election, the voters would then have two years to decide whether to re-elect those who voted to increase the debt ceiling or those who tried to be responsible and voted not to.   If there is no agreement of the type suggested by Speaker Boehner, the economy goes over the "fiscal cliff" in January anyway.  At least not increasing the debt ceiling will prevent further deficit spending fueled by borrowed money.  Moreover, there is reason to believe that not extending the debt limit will actually be good for the economy.  Government spending will be curtailed.  Some government services will also be curtailed.  This provides fertile ground for more free-enterprise solutions, more little companies, more employment in the private sector, and more GDP growth. 

Using the FY 2011 numbers above and below, we can see that in order not to create more debt, Congress would have to hold spending, including debt service, to $2,303 billion.  Congress would have to cut about $1,295 billion from proposed FY 2013 spending levels to do that.   

We can fund Social Security and Defense without borrowing.  However, the first call on available funds would have to be servicing the current debt.  We might have to change Medicare and Medicaid along the lines suggested by Paul Ryan, and we would have to be very careful about everything else.  Wouldn't this be a good thing?  Just think: after a few years, Congress might actually start to think about surplus budgets to pay down debt and gain spending flexibility from lower debt service costs.

Since it appears that the current president and Congress will never cut spending enough to balance the budget, it is necessary to force that action via refusal to increase the debt limit.  There is no time like the present to do this

Jeff Scribner is President of ASI Enterprises, Inc. (www.asienterprises.com), an investment bank serving small and medium-sized businesses.  Contact him at jscribner@asienterprises.com.

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