MuniLand

We shouldn’t dread the debt limit

By Cate Long
May 17, 2012

“Have a drink out there, folks, and just know that your kids and grandkids will be out there picking grit with the chickens,” says former U.S. Senator Alan Simpson in the video above. Simpson’s quip is the best summary I’ve ever heard of the public’s lack of understanding of the severity of the nation’s fiscal crisis. The federal government is currently borrowing 42 cents of every dollar that it spends. Thanks to the Federal Reserve’s quantitative easing and the strong global demand for U.S. Treasury debt, the nation has been able to borrow heavily at low interest rates to cover its budget shortfalls.

But the debt is piling up so high that the country might face a borrowing shock if there were a black swan event or if bond vigilantes forced higher interest rates. It’s not a question of whether rates will rise – they certainly will. What we don’t know is when it will happen. The same politicians who created this fiscal quagmire have now tasked themselves with fixing it. Despite numerous proposals on how to get our debt under control, the political dynamics of the issue make it likely that nothing will be resolved in Congress until after November’s election. The Washington Post reports:

But once the election is over … the issue of the debt will quickly rise to the top of the agenda – and not just because of the debt limit. In January, policymakers also will be facing the first round of harsh, across-the-board spending cuts adopted last summer, as well as the expiration of a host of tax cuts that benefit every American household. Unless Congress agrees on an alternative deficit-reduction strategy, the policies threaten to deliver a fiscal shock that could throw the nation back into recession.

Earlier this week at the Peterson Foundation’s Fiscal Summit 2012, House Speaker John Boehner gave a speech in which he laid out his plans for tax reform and vowed not to increase the borrowing limit:

Any sudden tax hike would hurt our economy, so this fall – before the election — the House of Representatives will vote to stop the largest tax increase in American history [the expiration of the Bush tax cuts]. This will give Congress time to work on broad-based tax reform that lowers rates for individuals and businesses while closing deductions, credits, and special carveouts. Eyebrows go up all over town whenever I talk about this, but when I say ‘broad-based’ tax reform, I mean it. We need to do it all … deal with the whole code, personal and corporate it’s fairer and more productive for everyone.

Meanwhile the Senate Republicans found an obscure Senate rule that allowed them to take control of the Senate for a day and hold a series of votes on their proposed budgets. From Bloomberg:

Lawmakers are set to vote on House Budget Committee Chairman Paul Ryan’s plan calling for deep cuts in government spending as well as taxes, along with a trio of other budget proposals calling for even steeper reductions. A plan by Senator Rand Paul of Kentucky would end Medicare, cut Social Security and eliminate four Cabinet departments. A proposal by Senator Mike Lee of Utah would cut the size of the government in half over 25 years. Senator Patrick Toomey’s plan would balance the budget in eight years, far faster than Ryan’s budget that wouldn’t eliminate the shortfall until 2040.

We shouldn’t dread the impending showdown over extending the debt ceiling. In its current form, the federal government is unsustainable, and many things have to change. The debt limit is a hard deadline that is focusing Washington’s attention again on our fiscal problems. Federal tax reform and budget cuts are politically messy and difficult, but state and local governments have been through four years of these battles. If local politicians can make hard choices, then national politicians can, too.

Without the debt limit, members of Congress and the president would never stop borrowing and spending. Endless borrowing papers over structural problems, such as excessive military spending, the 110 million people who are drawing Social Security and Medicare/Medicaid, and healthcare costs that are growing faster than the inflation rate. America is producing less; our government, and its expenditures, must shrink to fit the new economy.

Further:

Reuters: House Speaker Boehner reopens debt limit brawl

Comments
4 comments so far | RSS Comments RSS

Congress should have gotten its fiscal house under control a long, long time ago. Both parties are guilty. All they care about is getting re-elected, which they do by getting federal money spent on their districts. Money that hasn’t been made through any useful service, but is collected from all of us through taxes or created via the magic printing press. Which is really the only tool in the fed’s “toolbox.”

Using it will not only not solve today’s problems–it will lead to massive hyperinflation and an economy that will make the crash of 2008 look like the good old days we’ll never see again.

Posted by NewsLady | Report as abusive
 

While many of our politicians are not worthy of respect, the fiscal quagmire is the creation of our anti-tax agenda and our greed-blinded banking elite. You may recall that not much over 10 years our federal budget was in surplus. President Bush, either through stupidity (yes, he really was stupid) or design (yes, Republicans have actually advocated starving the government by running up the deficit) turned that surplus to deficit at a faster rate than any president in history (just the facts, ma’am). The politicians didn’t invent the massive poker games that the giant banks and hedge funds play with our pensions and 401k’s, but they had to cover the losses (sad, but true). That’s where the deficit came from – GWB’s tax cuts and covering the losses from the Big Men’s finanial poker. Social service spending, and even medical spending with it’s ridiculous inflation rate are not to blame for our current deficit. It’s the rich guys. Period. Remember what GWB said, “the haves and the have mores. I call them my base.” So who has even more now. Kind of like that was the plan, isn’t it. So that’s where we are now. What about the future? Should you be worried about too much spending on Social Security and Medicare? Naaaa! Be worried about the interest on those trillions in debt. Know how to fix that? Restore taxes to the 1980′s level on the guys who crashed the system and walked off with their pockets stuffed with your money (pensions and 401k’s and bailouts, remember). We don’t owe them, they owe us. As Ross Perot said, it’s as simple as that.

Posted by sandblast | Report as abusive
 

When I read an article like that I don’t know whether people described there simply have no idea what they are talking about or whether they actually know how the monetary system works and they don’t care about the consequences of their actions.

So what is the practical difference between Treasury liabilities (bonds) and Fed liabilities (currency, dollars)? (There are a few but these are minor). The gravest mistake made by these people is that they treat currency as a pre-existing commodity which needs to be borrowed or obtained by levying taxes before spending. (Gold standard was abandoned in 1971.) This is true for the households or individual states but it is false for the government sector as a whole. Money in the broad sense is injected to the non-government sector by the act of spending and it is removed by taxation.

See http://moslereconomics.com/wp-content/po werpoints/7DIF.pdf and contact Warren Mosler on his blog.

The root cause of the current slightly larger budget deficits is private sector debt deleveraging. Credit money is destroyed when loans are repaid (bank liabilities and assets disappear) while existing savers do not want to spend their savings. Restarting the growth of the credit financed bubble is currently impossible. An external source of money is essential to allow the natural process to take its course as in the 1930s-1940s. The only source of money may be the government sector running deficits as large as they are desired by the non-government sector because the foreigners don’t want to reverse the American trade deficit, too.

Public debt is not a burden to the future generations as proven by Abba Lerner. How did America finance WW2? What would Rep Boehner have done in December 1941? Would have he told the President that the war with Japan couldn’t be financed because the children would have to pay back the debt and therefore America needed to be surrender? Please compare the economic policy then and now – and the long term results.

If the West does not survive the current experiment with throttling the real economy with austerity and the Chinese fully dominate the world by becoming an economic number one, a little golden statue of Mr Petersen may be erected in Beijing to commemorate the person who contributed the most to conning the Americans into committing an economic suicide.

Posted by ad4mk4 | Report as abusive
 

It’s not the debt limit people fear, it’s the politicizing of the debt limit. Neither Dems nor GOP will give one inch to the other in this battle, both wanting to achieve their own agenda.

Fear the results of a broken, entrenched political system trying to agree on anything.

Posted by mick68 | Report as abusive
 

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