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What if we Don’t Raise the Debt Ceiling?

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There has been a lot of scaremongering about what might happen if Congress doesn’t raise the debt ceiling in the next few months, allowing the government to borrow even more money to pay for its inability to spend within its means. While there are many aspects of our budget crisis which should make you scared, the consequences of freezing the debt ceiling really shouldn’t.

The debt ceiling is a legislatively set limit on how much money the government is willing to borrow and add to the deficit. Right now it is capped at $14.1 trillion and we are rapidly approaching that limit. Last month we added $41 billion to the total deficit, which is fairly typical. That means we spent $41 billion more in April than the government took in as revenue during that month. That overage is about 13% of total spending for the month.

So when we reach that $14.1 billion cap, only the 13% of total government spending which is paid with borrowed money would be in jeopardy. 87% of what the government does would not be impacted at all. The president and the Treasury Department would then have to decide where to cut spending to cover that 15% over incoming revenue.

The scare tactic here is the claim that the response to this would be to default on our debts, thereby destroying the nation’s credit and leading to a plunge in all of our financial markets. The fallacy is that capping spending doesn’t mean there isn’t still money to spend. The government would still have plenty of incoming revenue and the ability to prioritize how it spends that money.

Interest on the debt is about half as much right now per month as the amount of deficit per month. To keep from defaulting, the government would just need to make sure that the 6.5% of the budget which goes to interest is part of the 87% which is paid rather than the 13% which needs to be cut.

We would only default on the debt if the president and his staff at the Treasury Department deliberately chose to pay other bills and not pay the interest. They’re unlikely to do that and provoke the crisis it would create and would reluctantly cut elsewhere instead. In fact, just to be safe, Senator Pat Toomey (R-PA) has introduced the Ful Faith and Credit Act which would require that debt service be paid first before other spending just to guarantee that we would not default. So if we chose to not raise the debt ceiling, defaulting on the debt would not be one of the outcomes.

Other scare tactics include claiming that Medicaid or Medicare or pensions or Veterans Programs or other vital services would be cut. But again, that would be at the discretion of the executive branch. It would not be at all difficult to cut the necessary money without touching those programs, especially in the short term. You just need to find about $40 billion a month to cut – that’s less than 1.5% of the total budget.

Just ending the wars in Afghanistan, Iraq and Libya would save enough money to keep us from going over budget for almost a year. The rest could easily be made up with smaller cuts. For example, Rand Paul has identified $42 billion we could cut from agricultural programs. That would buy us another month. He has also suggested $16 billion in cuts to the Commerce Department and $27 billion in cuts to the Department of Energy. Add those and you’re close to covering the whole deficit for the year.

Congress has already raised the debt ceiling 3 times in the last two years. That level of growth in borrowing and spending is absolutely unsustainable. Right now our deficit actually seems relatively small at 15%, but projections show it ballooning to 40% of the current budget within a decade. That’s what we should really be afraid of, not a cap on spending which would just necessitate some reasonable spending cuts.

The only way to stop that explosion of debt is to stop borrowing and start paying back what we already owe. The first step towards that objective is to not raise the debt ceiling. Congress and the executive branch have already shown that if you give them money they will spend it. If they cannot be responsible then maybe we can force them to control themselves by just not giving them any more money.

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About Dave Nalle

  • Glenn Contrarian

    Yes, Dave, I’m very sure that you know better than the vast majority of economists who are using those “scare tactics” – otherwise known as warnings by those best qualified to issue those warnings – telling us about the dire economic consequences of not raising the debt ceiling.

    But you know better than them, I’m sure…just like most conservatives “know better” than the vast majority of climatologists about AGW (“it’s all a liberal conspiracy to destroy the economy!”), and most conservatives “know better” than teachers about what’s necessary to fix education (“slash the education budgets to fix our education problems!”)…and let’s not forget the Religious Right and their effort to inject creationism into our classrooms.

    I do so wish that y’all would learn that more often than not, those who are best qualified and most educated on a particular subject SHOULD be the ones whose opinions are valued, rather than going down the road of “dogma uber alles”….

  • http://www.republicofdave.com Dave Nalle

    Glenn, just because some loyal Keynsians agree with endless spending and bankrupting the country that doesn’t mean that economists as a whole do. Go read some of the articles at Cato or Reason.

    But read the article or do the research yourself. We should look at this as an opportunity to make the government more lean and not spend beyond our limits.

    Dave

  • Cannonshop

    Dave, the one thing that both parties seem to agree on, is that the well is endless where spending is concerned-they just disagree on where to send the money they’re both intent on borrowing.

    The reason is that it’s EASY to be a Keynesian-or at least, a half-assed one, and it’s HARD to rein in spending when you have all of K-street and Wall-Street out there with their hands out and a pot of grease for the next itchy palm come election time.

  • Boeke

    So I’m curious: just which papers by JM Keynes do you guys object to?

    You HAVE read Keynes, right? Otherwise you wouldn’t be entitled to complain so much. I mean, you didn’t just take your ideas from oppositional writings by rightists, did you?

  • Clavos

    That means we spent $41 billion more in April than the government took in as revenue during that month.

    That’s because I haven’t paid my taxes yet this year. Once I do, everything will be fine.

  • Clavos

    See that picture in the article?

    Geithner is reaching for your wallet…

  • Baronius

    Boeke – Keynesians don’t have much to do with Keynes anymore, and politicians who call themselves Keynesians have nothing to do with him. “Keynesian” is one of those political words that changes in meaning over time.

  • Baronius

    And what happened to this thread? It looks like it’s been edited badly.

  • Glenn Contrarian

    Dave –

    There’s a BIG difference between cutting on spending AND raising revenue – which is how we got a SURPLUS in the late 1990’s, so much so that it would have paid off the ENTIRE national debt by next year…

    …and shooting ourselves in the foot by forcing America to default on her loans.

    Isn’t that the conservative mantra, that one should NOT default on one’s financial obligations, but should instead try to be thrifty enough to live within one’s means? It really wouldn’t be that hard to balance our budget and bring it back to the surplus side…if Washington weren’t so hidebound to the philosophy that Thou Shalt Not Cut Defense Spending, even when the JCS Chairman states what a threat to national security our deficit is, and that we need to cut defense spending and spend a portion of the savings on education in order to invest in our youth.

    But I know, I know…he’s an appointee of a Democrat, and therefore is not only flat wrong, but is part of that vast left-wing conspiracy to destroy America….

  • Boeke

    So ‘Keynes’ is just a cuss word then? Just something to spit out to signify disapproval? Must be a rightwing thing. Too bad.

  • Baronius

    Boeke, the distortion of Keynesian thought is a product of those who claim to practice it, not of those who claim to oppose it.

  • Glenn Contrarian

    But there’s another factor we’re not seeing – if the Republicans force Obama to refuse to raise the debt ceiling – which they can do if they load the bill with spending cuts that cannot be accepted – America will suffer a huge economic hit…

    …and suddenly Obama becomes more vulnerable in the 2012 election.

    Chess, not checkers.

  • http://tmackorg.com/ Tommy Mack

    Since March 1962 the debt ceiling has been raised 74 times. According to the Congressional Research Service, 10 of those times have occurred since 2001. Theoretically, the debt ceiling limit is supposed to help Congress control spending. However, in reality, the debt limit is ineffective in controlling spending and deficits.

    It’s Barney Frank who calls the raising the deficit ceiling debate best. “In the end, the Republicans are not going to be able to withstand the pressure from the business community, the guys who finance their campaigns. … In the end, they have to do this.”

    Posturing about the debt ceiling is just for show. Politicians and reality continue to be strangers to one another.

    Tommy

  • http://handyfilm.blogspot.com handyguy

    The reason the threat to refuse to raise the limit draws scary warnings from a wide range of economists, investors and business executives [not just liberals or Keynesians] is that it would demonstrate to the world that our dysfunctional political class is unwilling to get its house in order — willing instead to take unnecessary and stupid risks to score a point against opponents.

    US treasury debt is still the world’s prime investment vehicle. Any doubt about its continuing security really could roil the markets. You’ve seen them roiled by much less. And the damage to investors’ trust could be long-lasting and lead to financial stress that could mortally damage the still fragile recovery. Why risk it?

    What a reckless, destructive, tunnel-visioned article. I hope Tommy is right about all this being posturing, but it is still disgusting.

  • http://tmackorg.com/ Tommy Mack

    It is disgusting. But wait, there’s more.

    The federal budget is actually on automatic pilot, anyway. The reality is that neither Congress nor the presidents have anything so say about it.

    Tommy

  • Cannonshop

    #14 Actually, Handy, raising the debt ceiling tells the world that the political class aren’t willing to get their house in order, or make hard decisions necessary to restore credit-worthiness. It’s a blatant delaying tactic, but the debt (what is owed) remains, merely growing larger, and even less likely to be paid off.

    Private entities eventually run into a wall where they can’t extend/over-extend any further, but that wall is a different shape with governments, and where a private entity’s bad credit and failure to restrict its’ spending might hurt a relatively isolated portion of hte nation, when government does it, you get the Weimar Republic right before the Nazis took it over (or Zimbabwe).

    Refusal to acknowledge the reality of a situation is generally accepted to be a sign of bad or incompetent management. Raising the Debt ceiling instead of reducing revenue outlays demonstrates a refusal to acknowledge the reality that, not only is the credit over-extended, but the groups who make their living evaluating it (Standard and Poors, for example) are no longer willing to ignore the situation out of patriotic and/or other emotional feelings.

    Those in the business community NOT relying on Government Hand-outs are already lacking confidence that the government will get its house (currently a gutted shack) in order.

  • Boeke

    7-Baronius: What politicians describe themselves as Keynesians?

    Hey, you said it.

  • Boeke

    2-Dave Nalle: I’m not aware of ANYONE who “…agree(s) with endless spending and bankrupting the country …”. Do you? Well, there WAS George W Bush, but he’s gone now, and anyway I don’t think you’d call him a Keynesian.

  • zingzing

    boeke, you know dave’s trump card is endless hyperbole and bankrupt reasoning.

  • Boeke

    11-Baronius: I don’t know anyone “…who claim to practice it (Keyneseianism)…” do you? I only hear about denunciations of Keynes, and that’s from rightwingers on BC.

  • Boeke

    If one is to mention Keynes then one ought to know at least one thing about him. Here is an aphorism of his that is seemingly free of political bias:

    “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

    I read some Keynes when I was at University, and I think he was pretty smart. His notion of taxes was quite different from what his enemies say. First, he accepted the premise of thinkers before him, going back at least to Hume, that the capitalist system is characterized by cyclic swings that are independent of physical phenomena, like drought and flood, and created from systemic characteristics within the system. Most notably the tendency of crowds of investors to all rush to one side or the other. Positive feedback, which every engineer knows leads to instability.

    So Keynes solution was to increase taxes during flush times (so as to tamp down unwarranted exuberance) and decrease taxes in bad times (to loosen up transactions by reducing financial friction).

    You could do worse than reading some Keynes.

    “It is better to be roughly right than precisely wrong” Keynes.

  • http://www.republicofdave.com Dave Nalle

    Boeke, when did you ever see me not blaming Bush for his part in all this?

    Please try to pay attention.

    Dave

  • Baronius

    Boeke –

    “So Keynes solution was to increase taxes during flush times (so as to tamp down unwarranted exuberance) and decrease taxes in bad times (to loosen up transactions by reducing financial friction).”

    You left out the part about increasing government spending in bad times. That’s what I mean when I say that most politicians are claiming to practice Keynesianism. It’s treated as a fact of life that government can spend its way out of a recession. I mean, do you really need a list of politicians who’ve said the word “stimulus” in the past three years?

    You’re right that the picture of Keynesian economics that’s commonly given isn’t the full story. Along with spending more during a recession, government is supposed to spend less during a boom. Keynes would have never signed off on deficit spending during periods of economic growth. That kind of “overspend in good times, overspend in bad times” thinking is what’s spoiled Keynes’s reputation in so many people’s eyes. (That’s what I was referring to when I said that his supposed practitioners were the ones responsible for changing the meaning of the word “Keynesian”.)

  • Cannonshop

    #23 Perhaps we could identify the people mis-using Keynes’ theories as “Neo-Keynesians” (Kind of like “Neo-Conservatives” being big-government nanny-staters yet claiming not to be).

    Though we really don’t need to invent a new term-just call them what they are:

    Republicans and Democrats.