We shouldn’t dread the debt limit
“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.
Reuters: House Speaker Boehner reopens debt limit brawl