What the Debt Ceiling Really Means
cato.org
cato.org
"The clock is slowly ticking toward Aug. 2, the date on which the U.S. faces "fiscal Armageddon" — according to the Obama administration — unless Congress agrees to raise the debt ceiling. But would we?"
Yes, it's an Armageddon according to the Obama administration. But also Speaker Bohner. And Senator McConnell. And Moody's. And the CBO. Etc.
It's also terribly inaccurate, even from a Cato perspective. A 44% cut in federal spending really isn't accurately described as something that will "almost certainly hurt." Pretending to believe that that's doable in any sensible way doesn't lend much credence to the writer.
Even if it were possible to do things as he suggests, it wouldn't solve the central problem. The United States has _legal obligations_ to pay Social Security benefits, make sure our retired soldiers receive their pensions, and other civil servants get the healthcare benefits they're entitled to as part of their agreed upon compensation package. These aren't things you can go "oopsies, I don't feel like paying it, maybe next month." And even if you were to do this with extremely questionable legality, it wouldn't help the central issue, which is faith in the credit of the United States. If I pay off my credit card bill but have to renege on my mortgage and car payments to do so, my credit is still going to be shot.
Lastly: this is about two weeks late in Republican messaging. It's now Obama who's pushing for larger long-term deficit reduction and spending cuts than Republicans (on the order of 4 trillion instead of 2 trillion over the next decade). This is, it should be said, not merely twice as big as the Republican package but also twice as stupid and boneheaded. Regardless, that's how things stand--Republicans are likely to refuse Obama's 4 trillion in favor of their 2 trillion, which is only half as stupid so on net good for the country. Good for them, but unfortunately it undermines the Cato dude's argument about it being about the deficit.
Large super-majorities of the public oppose cuts to SS and Medicare. This, by the way, includes self-identified conservatives and Republicans. In large part this is the public being ignorant and wanting something for nothing--if the public had their way, we'd balance the budget and double Medicare and SS benefits by cutting foreign aid payments.
That said, for something as important and widely supported as these two programs, we should be discussing solutions to their long-term funding issues as a standalone debate. Cutting them after a month of backroom negotiations while using the credit worthiness of the USA as a hostage strikes me as very inappropriate and not politically sustainable.
Edited to add: the reason these cuts are stupid is because many of them would come into effect immediately, which would be disastrous for our already weak economy. The size of the cuts are appropriate if projected into the future and not the immediate present.
I'm also not sure the cuts are as immediate as you say. I can't find any details on what is being negotiated (both leaderships and Obama have refused to give specifics), but on the revenues side for example, Obama said today that even the tax increases that are being talked about wouldn't come into effect until 2013. If they are talking about raising the retirement age or restructuring Medicare, I wouldn't rule out that it would take place over time or have a grandfathering period.
I agree that the debt ceiling and deficit reduction discussions should be separate, but the ship sailed on that a while ago, so all of the above is written from the perspective of dealing with this stuff in the present context.
It's as if Joseph told the pharaoh that "7 years of plenty are coming..." and the pharaoh cut him off before he could finish and said "hey everyone, we'll be doing really well for a while, let's start a huge party!" And everyone partied so hard they had to borrow from their poorer neighbors because the party was going so strong all their neighbors just said to themselves "oh they are good for it," and after 7 years of partying really hard they said their children had a "legal obligation" to make sure they could still party during the 7 years of famine that all of them ignored.
But it is ok, right? Because "in the long run we are all dead" and it takes a Austrian Economist so long to be right, by the time it come to paying the piper everyone has forgotten and is asking themselves "why didn't anyone see this coming?"
It's time this country learned to live within its means. That goes for the government and the people in it, too.
If you're feeling really wonky, you'd also adjust for sector-specific inflation. For instance, disproportionate increase in the cost of health care. Which I hear the government spends a couple dollars here and there on...
Counterintuively, during a recession, the government is usually the only entity that's able to pump enough money into the economy to fuel growth and ultimately end the recession – i.e. the time that its spending is most critical is when its income is at a low. The Great Recession lasted so long precisely because the government tried to "live within its means" rather than getting out the jumper cables. This is also central to the current debate about the best course of action for EU countries, most notably Greece, at present.
The danger of simply cutting costs is that it may plunge the country into prolonged recession and ironically impair the country's ability to manage manage its debt effectively. Punditry aside, it's typically been the Democrats in recent decades that have put more effort into reducing the national debt (as Obama is proposing now through increased taxation).
At least in theory, if not always in practice, the entire American political spectrum agrees that US debt must be minded and that the current level relative to the GDP is sub-optimal. But the ability to repay debt is linked to the health of the economy, and the goal is to avoid being penny wise and pound foolish.
Yes, that's the theory. But look around you. Is it working?
No. We're doing way worse than those recessions where we instead responded by cutting taxes and actually living within our means.
This theory is wrong.
It's 2011. If this were going to work, it would have worked by now. It's not three months after the crisis anymore and it's past time to stop talking like it is. This approach is now a concrete failure, and I really don't buy the whole "it just wasn't big enough"; it's already far larger than it ever has been before, and what we've got is a far larger failure than ever before. (And I mean, policy failure, not just financial crisis size.) It's time for people to stop running around and talking as if the bastardized Keynesian economics the government is babbling about has any sort of connection to reality. They've have repeatedly utterly failed to correctly predict the effects of their policies, and that's the standard that matters in the end, more than anything else.
We've tried spending like drunken sailors. It's time to try... not.
I think perhaps I should have hammered on that point a bit more. Predictions were made based on a certain model; predictions failed. Anyone with a scientific viewpoint of the world ought to be able to see what that means: Model wrong. And the model being wrong has implications, not least of which is that your confidence level in all the people confidently lecturing us about the folly of actions like cutting government spending based on this model, this model already proved wrong, should be significantly lowered. After the performance of this economic model, after the endless month after month of "unexpected" economic news, we're really supposed to just keep pissing trillions more dollars away because by golly, hopefully, someday this model will start working if we just try hard enough? I recognize that pattern; it's a failure scenario, not an immanent-triumph scenario.
Second, the market is actually doing quite well, as predicted. Jobs, on the other hand, are not so great. Basic economics predicts that stimulus via infrastructure spending is the best way to accelerate growth in the job market -- which is exactly what we didn't do.
I have no idea where you got the idea that this recession was treated with an all-out spending spree. It wasn't. The same fiscal austerity measures that are failing Europe are going to be implemented in the US and fail just as badly.
Which is why I carefully qualified my statement with bastardized Keynesianism. I don't mean that as a pure insult; I don't particularly believe it's the best economic model, but I don't have much evidence either way w.r.t. the current situation, because it isn't what our government is actually using. It's what it claims to be using as cover, but take Keyne's theories and feed it the actions of our government, and the anemic recovery and ballooning debt is pretty much what it predicts too.
Proper government spending may be the best way out of a recession (I'm very skeptical about it, but it may be true), but even Keynesian theories would seem to say that no spending would better than spending that has a less-than-unity "multiplier". I am much, much less willing that most people to simply assume without actual evidence that spending must have a over-unity multiplier, and I don't see much evidence that our current spending does.
"I have no idea where you got the idea that this recession was treated with an all-out spending spree"
Reading what Keynesianism says and comparing it what money is actually being spent. The so-called "stimulus" has virtually no relationship to what the theories call for (it isn't quite zero, but spending that actually conformed to Keyne's theories were in the high single-digit percents of ARRA last I knew), and there doesn't seem to be any other really compelling philosophy behind ARRA, so barring some other coherent explanation of how the actions of the government are supposed to be helpful, I'll characterize it as an all-out spending spree. It isn't that big of a leap. You just have to look at what is actually being done, and not what is being said.
Yes, but what you said is:
Yes, that's the theory. But look around you. Is it working? No. We're doing way worse than those recessions where we instead responded by cutting taxes and actually living within our means. This theory is wrong.
This implies that the Keynesian theory of stimulus spending is wrong but you yourself admit that what is actually being done is not what is suggested by theory, it is some strange bastardized form. Actual Keynesian theory has been practiced in previous times and has succeeded relatively well. Even in this recession, the Scandinavian economic response is mostly Keynesian and they have weathered the recession very well.
Actually, we brought in the word "Keynesian" later. The original message I was replying strikes me as being based on the idea that it's just "spending", especially at the point where it claims that the Great Recession is from us "living within our means", which is a claim that just boggles my mind. The theory is that unqualified government spending is what pulls economies out of recessions; the reality is that isn't working, and also, it's not really Keynesianism. No contradictions.
Which recessions were those?
We'll survive. And when the resulting recession / depression ends, we'll be out of debt.
How long can we keep sweeping our multi-trillidon debt off our shoulders like a bad case of dandruff?
-An abrupt drop in consumer spending due to paychecks lost in that 43% cut.
-Moody's and S&P have committed to downgrading the USA's debt from AAA if the debt ceiling is not raised. Remember the liquidity crisis the financial sector suffered in 2008 due to a sudden shortage of AAA bonds? There are a lot of Treasuries out there.
I'll leave third-order consequences up to the post-apocalyptic novelists in the audience.
If a little pain now helps solve that problem for the long term, it may well be worth it."
Great idea - you're pretty sure that everything will be ok if we don't raise the debt ceiling, so let's go ahead with it and just hope that you're right and it isn't that bad.
The only real threat to drive up US interest rates is not raising the debt ceiling. With the stuff going on in Europe, we will likely have more people wanting to buy US Treasuries - not less.
These guys are worried about an event that hasn't happened, and doesn't seem to be happening, so instead they're going to do the one thing that can actually cause it happen.
Insane.
I am not even American - heck I don't even live in America - but I shudder at the thought of America not being able to honor all legal obligations.
It's not about the money. It's not about how much money the US gov't will collect in August vs how much it has to pay out. America is the largest economy on the planet with the largest bond market and subsequently the largest government bond market. It also happens to enjoy, as the french put it, exhorbitant privilege - because not only can it borrow in it's own currency, but it can print new money to repay outstanding obligations. No other country on the planet has that ability to do that.
The entire bond markets have rated the US gov't's abilities to repay said bonds at the highest rating for at least the last 30 years.
A 'minor' disruption like this, at a time when job numbers in the US consistently disappoint. When only God HE knows what will happen with the Euro, all it takes is some event like this to send the entire global economy back into recession and possibly worse.
If the economy goes into a whirlwind now, where sovereign bond markets are threatened, the repercussions could be even more severe than the credit market freeze we just saw.
Imagine if it escalates - although it is easy to say, it will never escalate, well I always said we would never reach this point, and look at where we are now - and creditor countries don't want to invest in Treasuries any more, the repercussions could be disastrous and could lead to Nuclear War.
I know it sounds hyperbolic, but imagine if America can't pay it's bills and China doesn't want to lend it money to pay it's bills...what choice does America have but to go to war with China? Especially when the government is under intense domestic pressure because they never extended the damn debt ceiling and avoided this in the whole place. It almost becomes the least worse choice. War with China or domestic revolt.
Sure you say, Americans would never revolt - but when SS checks stop arriving and tons of old people can't get their health care taken care of, let's see if you still say that.
Not to mention that if America defaults on the debt, it could send ripples all throughout China and cause significant issues there leading to an implosion of economic activity - which would actually incentivize China to go to war with America.
Again, I know it sounds very hyperbolic and VERY far-fetched, but so did the real estate market collapsing in the middle of the worst credit bubble burst America has ever seen.
It's all about timing.
The world is not in a position to deal with a default like this in a measured manner.
God help us all, if it ever comes to a default right now.
Talk about the perfect storm.
Foreign aid to Israel and Egypt is magically delayed, too. This debt ceiling could be used to hit goals that the progressive movement has wanted for years and put the Republicans in a weak position for negotiating. Everyone would hurt, of course, but it wouldn't last long before Republicans blinked.
- from a conservative think tank's perspective. No one blinked an eye from the conservative side as deficit spending rose all through the Bush administration and the debt ceiling got raised 7 times.
Heck this article may even be technically correct but it skews hypocritical when it only becomes an issue during Democrat's administrations.
Well, the Republican party might not have raised a big stink about it, but plenty of conservatives were definitely complaining.
Edit: colindoc84 almost has a good point, so edited.
The Democrats do the same thing: Clinton wasn't a real "democrat" because he signed NAFTA and reformed welfare. Obama "wasn't real" because he couldn't end the wars, close GITMO or reform the finance industry. (a number of other items)
Of course you can split things much further than that; nothing really stops you from being an anti-abortion otherwise-social-liberal, but I really think failing to split out social/fiscal leaves you really baffled by who is aligned with who.
If the article is technically correct though, that's all that matters. Let's use facts expressed in numbers to make decisions and leave emotional concepts like "hypocrisy" to artists.
"If we are really worried about a hike in interest rates, what about the hike we can expect if we fail to get federal borrowing under control?"
Interest rates are as low as they've ever been. In fact, the only "threat" of our rates for borrowing going up have not been for borrowing more, but quite the opposite.
http://krugman.blogs.nytimes.com/2011/07/10/feel-the-pressur...
"The real fiscal Armageddon that this country faces comes not from a delay in raising the debt ceiling, but from out-of-control federal spending and government debt."
Except that this "out of control" federal spending has been rising at the same rate as a % of GDP essentially since 1950.(minus a blip in 1992)
http://www.usgovernmentspending.com/us_20th_century_chart.ht...
It's fair to say we have both a spending and a revenue problem. This page shows how revenue has been dipping pretty dramatically the last couple of years: http://www.deptofnumbers.com/blog/2010/08/tax-revenue-as-a-f...