With the May 16th “deadline” rapidly approaching before the United States reaches its legally-imposed borrowing limit, the very first thing one must assess is whether there is any merit to extending the nation’s credit, or instead cutting it off. According to CNN, that limit remains at just under 14.3 trillion dollars, and there are effectively three possible outcomes: An increase in the ceiling, a dramatic and almost-overnight slashing of spending combined with leaps in taxation, or default on our debts.
Its a difficult and vastly complicated question, but the reasons for one cause stand out against its opponent.
Examining the Case Against Raising the Debt Ceiling.
As a friend of mine points out, one has to remember the case of a credit card user who has burned through his allowance and asks his provider for a further extension of credit, claiming it will help him refinance his older debts and pay them off more effectively. We’ll call him Bob. This man has bought many things, some of which are frivolous, and he has also sung this tune before. He might well take that credit and throw it out the window, then come back begging for more. The Bank of Metaphorica has every reason to decline this request and force Bob the bum to pay up – even if he has to declare bankruptcy to do so.
Put more succinctly, again according to CNN, the debt ceiling has been increased over 70 times since 1962 alone – 74, to be exact! For an upper limit intended to curb spending, there has been a chronic failure of restraint in this regard – Bob the credit-card user and abuser has certainly sung this song before! Furthermore, our actual debt is both astronomical and owed toward some surprising sources. Taken from a pie chart on www.ritzholtz.com, copyrighted to Political Calculations, 2011, and sourced from the U.S. Treasury dated at September, 2010, the usual suspect China is surprisingly overwhelmed by both U.S. Individuals and Institutions as well as the Social Security Trust Fund. Simply put, the U.S. government owes around 60% of its $13 trillon-plus debt to the citizens of the United States, in one form or another. The remainder is spread across various other nations including Japan and Great Britain, as well as a vaguely defined group of oil-producing states.
Now, this debt is no doubt massive, but does that alone compel someone to forbid allowing a higher level of it to be reached? After all, its already bad enough – why not just end it now and force a change in policy more directly? Letting Bob borrow more only means we’re going to end up a little deeper on the hook when Bob inevitably can’t pay off the debt, and it doesn’t matter if its $14 trillion or $20 trillion when things come to an end.
The Case for Raising the Debt Ceiling.
Bob’s predicament is certainly difficult, but if it doesn’t matter whether its $14 trillion or $20 trillion when he defaults, there’s also no reason not to give him a final chance to buy himself out of trouble. However, that chance needs to come with some serious restrictions, and a critical understanding of just what, as reported by UPI, the President’s term “Shared Sacrifice” really means. Simply lowering the deficit will not prevent the nation from accruing further debt; the time has come to begin to reduce that debt, not just slow its increase.
Taken from Wikipedia and sourced to the Congressional Budget Office, there are two charts I’m going to put up that demonstrate our income versus our outcome – how much we take in versus how much we spend. Warning: It ain’t pretty.
Simply put, the U.S. Government spends more than it takes in. With an income of only $2,162 Billion dollars (I know, so little) as compared to a lay-out of $3,456 Billion (Really? 3456?), Bob’s in a lot of trouble. That’s a difference of $1.294 trillion dollars, folks; if you divide spending into income you find the former is about 160% of the latter. The politically correct term is “unsustainable,” but I’d prefer to refer to it as insanity. Is there a legitimate argument for the madness? Yes.
Yes, extraordinary times call for extraordinary measures, and the various reform acts undertaken since TARP make a reasonable enough degree of success; a lot of the deficit is spending-related, but much of it is from a lack of tax returns due to a terrible economy. By boosting the economy up, tax returns will grow as well – but this will only serve us to a point. That aside, lets return to the principle argument, as we’ll discuss remedies for this problem in a later article.
The outcome of not budging on the debt ceiling, the “spending down, taxes up” one, helps nobody. All the talk about “killing the recovery” is well and good, but the fact is that at some point, someone is going to have to pay for things. With the defense department alone eating up about $2 billion/day and with other programs eating their shares, sooner or later the stop-gap is going to give way. Sooner or later, Bob’s car is going to break down and there’ll be a reckoning.
Our second, oft-touted doomsday scenario is that the U.S. defaults on its debt, making the dollar virtually worthless and crashing the global economy in ways it might not recover from for decades. Remember how 60% of our debt is owed to ourselves? That’s painful, and more than painful its unfair to those who have paid into programs such as Social Security and have effectively been stolen from. That can’t be allowed to happen.
Finally, there are ways to ameliorate the problem; even if there is no return to a budgetary surplus overnight, there can be a reduction in the debt that allows us to pay off our more painful loans by taking out newer ones – refinancing, as its sometimes called. That will reduce our overall problem further, and over time it can be eliminated. The cuts and changes in lifestyle required will still be painful, but if Bob can work out a good payment plan he can pull himself out of the hole he’s dug.
Raising the Debt Ceiling is the Best Solution.
As summed up above, the argument for “why raise the debt ceiling” amounts to a moral story – Bob is a credit risk, has a terrible history of abusing his credit, and might therefore never change his habits. It suggests that the situation is unsalvagable, and that the plug needs to be pulled on Bob before he collapses on his own accord. It draws on the notion of a slippery slope – that if Bob can borrow $20 trillion today he’ll be in asking for $30 trillion tomorrow. Never mind that it isn’t necessarily any worse for him to default at one of those numbers as opposed to another: For the average person, these numbers might as well represent monopoly money, not Greenbacks.
However, cautionary tales are something to be learned from, and if the moral perspective in question is fulfilled immediately it will lead to serious, real economic consequences. John Hawkins of Right Wing News sums up some of them brilliantly, if perhaps looking at the most dire circumstances that have been proposed while singling out special-interest targets that barely scratch the surface of the problem.
Is it worth the risk of such apocalyptic scenarios to adhere to a moral standard? Sometimes! But, this isn’t one of those times. There is every chance that, with so much public attention already on the economy, politicians won’t be able to drop back twenty and punt this time. The people of this country are looking more closely at our national finances than they have in a long time, and if there is no answer there will be hell to pay when the bills come due. Raising the debt ceiling now is a sign of faith that the problem can be solved, thus calming credit markets and preventing additional complications, and it buys time for the political process to produce the answers needed to avert a long-term crisis.
But what will those answers be? Ahh, a good question – and one for another time.