1.04.2013

Anything but the Debt Ceiling Fight

So it seems Congress, or at least the nihilistic wing of the House GOP, is gearing up for another fight over the debt ceiling. If you thought Debt Ceiling Fight I was bad, or for that matter that the Fiscal Cliff Fight was, I imagine you've got little stomach for this one. I feel for you. The facts are, though, this should not be a fight at all. This is a completely insane way for the House GOP to conduct themselves. Failing to raise the debt ceiling is, in essence, telling our creditors that we may not pay them back. It's defaulting. It's blowing up the "full faith and credit of the United States of America."
Seriously.
Let's get into why:

Firstly, the United States is not a household and its finances do not function like a household's.
This is why it doesn't actually need to balance it's budget. You can't take in less than you spend, but then, you don't have a sovereign currency, do you?
But this applies to the debt ceiling fight as well. When Congress "spends money" it does so by passing legislation that says "We will spend $1 billion dollars on project X." But neither Harry Reid nor John Boehner nor Barack Obama swipe the nation's credit card at that moment. The money is allocated and it is spent on the project when the project needs it (like after the plans are done and it's time to buy materials). This produces a delay between the time of "spending" and the time of borrowing that a household does not experience.
So people like to say that the debt ceiling is like a credit card's spending limit. That's sort of true, but it fails to take into account that you spend against your credit card in realtime, where the federal government does not.
When raising your credit card's spending limit, you are allowing yourself room for future purchases. When raising the debt ceiling, Congress is allowing itself room for purchases already made.
Raising the debt limit is NOT like raising your credit card limit, because you raise your credit card limit to spend more and the debt limit deals with spending Congress has already done.
It's calling your card company and saying "I just swiped my card to buy a $1000 TV, can you make sure my credit limit is $800 before this charge posts to my account?"
It's saying to those you owe (be it the card company or the poor guy at the TV store, "I have no real intention of paying for this."

But what's wrong with threatening government shutdown if the Senate won't get real about spending cuts?
First of all, it's a fallacy that this country has an existential debt or deficit crisis. We have a sovereign currency, so we can have a deficit. Also, most of the current deficit is a function not of the welfare state but of the recession (which you may recall was caused by deregulation of Wall Street, not welfare fraud or social security recipients living too high on the hog).
Some debt is necessary for the government to keep, the government's intention to pay (it's "Full faith and Credit") is what keeps the economy ticking in the form of Treasury bonds and the US Dollar. If the US Government paid off all of it's debts and deficits (not the same thing, btw) it would crash the currency.
But fine, let's agree for the sake of argument that spending cuts NEED to happen. If House Republicans were threatening a government shutdown until spending cuts were agreed upon, I'd be pretty upset but I wouldn't be apoplectic the way I am today. That's because what the House is talking about is NOT a Government shutdown. It's a detonation of the US Economy.
Refusing to raise the debt ceiling is nihilism. We're talking about investors foreign and domestic dumping US Treasury bonds decimating the government's ability to spend, raise capital, and probably issue a currency. We're talking about the US Government losing the ability to borrow money effectively at even 'acceptable to Republican levels.'
We're also talking about doing this to ourselves, thus pretty much permanently sacrificing the right of this country to hold itself up as a beacon of much of anything on the national stage. Once the global economy recovers from this cataclysm, no member of it is going to want to hear economic or governing pointers from the idiot who nearly destroyed it.

If this sounds extreme, that's because it is. What the Tea Party/Far-Right wing of the House Republicans are suggesting, and to a lesser extent even what their slightly-more-moderate Speaker is suggesting, is taking a hostage that they cannot afford to kill.
But as 67 House Republicans proved today in voting not to allocate $9 Billion in aid to displaced victims of Hurricane Sandy, this is a party that's capable of some pretty ugly shit to maintain their policy of non-compromise on fiscal matters.
Just look at your money and pray, because In God We Trust on this one.
Certainly not in the Grand Old Party.

3 comments:

  1. Having public debt exceeding 100% of GDP is not sustainable. The last time it happened was after WW2, and it was paid for by a 6 fold increase in the federal budget. That is no longer possible, since the federal budget is over 20% of GDP, and revenue via income taxes cannot be increased like it could after ww2.

    To simply say we have a sovereign currency, and it's ok to have a deficit, doesn't account for the big picture. The US cannot continue to have a 30% deficit indefinitely, as we will lose our borrowing power, or worse, the US dollar loses is de facto status globally, resulting in the same effect as capping the debt ceiling that you warn about. It will obviously happen slower, but it would be detrimental for our economy nonetheless.

    I don't think that holding the debt ceiling hostage is a good option, but neither party has shown any willingness to or even a decent understanding of why, we HAVE to get our spending under control. I don't care for the GOP one bit, but at least they have a political interest in cutting spending. They're interests are for all the wrong reasons, ie they want to get re-elected, and they're voter base is largely fiscally conservative, but you have to take what you can get.

    From an economic perspective, we're way of whack even for a Keynesian, Keynesian principles dictate that government spending must be lower than revenues during boom years to save up for the deficit spending that will need to occur during recession. Keynes even recommends using draconian cuts to soften booms, so that recessions will be milder, but even under Clinton and the balanced budget, the public debt was not reduced to below 25% of GDP. No one was even considering actually saving up.

    The US has gotten so far off track from an economic perspective, drastic measures are likely going to be necessary, and our standard of living is likely to plummet, but I see no alternative. Raising sufficient revenue to support our current level of spending would send us into a death spiral.


    To simply say we have a sovereign currency, and it's ok to have a deficit, doesn't account for the big picture. The US cannot continue to have a 30% deficit indefinitely, as we will lose our borrowing power, or worse, the US dollar loses is de facto status globally, resulting in the same effect as capping the debt ceiling that you warn about. It will obviously happen slower, but it would be detrimental for our economy nonetheless.

    I don't think that holding the debt ceiling hostage is a good option, but neither party has shown any willingness to or even a decent understanding of why, we HAVE to get our spending under control. I don't care for the GOP one bit, but at least they have a political interest in cutting spending. They're interests are for all the wrong reasons, ie they want to get re-elected, and they're voter base is largely fiscally conservative, but you have to take what you can get.

    From an economic perspective, we're way of whack even for a Keyensian, Keynesian principles dictate that government spending must be lower than revenues during boom years to save up for the deficit spending that will need to occur during recession. Keynes even recommending using large cuts to soften booms, so that recessions would be more mild. Even under Clinton and the balanaced budget, the public debt was not reduced to below 25% of GDP, never mind actually saving up.

    The US has gotten so far off track from an economic perspective, drastic measures are likely going to be necessary, and our standard of living is likely to plummet, but that's what happen, when you live off of borrowed money year after year.

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  2. Pardon the double comment.

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  3. I don't know that you said anything I disagree with. I'll admit to committing some oversimplification in my deficit defending, but that was because the point of this post was more about the debt ceiling hostage taking than about the real specifics of Keynesian economics and debt vs. GDP.
    We need to reign in spending, but there's no existential reason that we need to do it THIS MONTH, or do it in a way that threatens to weaken our currently fragile economy.
    This Congress (okay, technically this last congress) has proven unwilling to talk about realistic and fair options on both sides. But it is the House GOP that ha threatened to use the debt ceiling as a bargaining chip.
    I don't at all let Obama off the hook, in terms of unproductive negotiating. Removing the cap on social security payroll tax for earnings over $130K would allow SS to be solvent for another 70-some years, so making cuts to it (and chained CPI is a cut) is unnecessary from a solvency standpoint, irrelevant from a deficit standpoint (as we both know SS doesn't contribute to the deficit) and the whole idea is just a preemptive capitulation to the fact that the deficit hawking is mostly just a smokescreen perpetrated by the power elite in Washington and on Wall Street to attempt to erode the (essentially un-related to the problem) social safety net.

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