Tuesday, July 12, 2011

The Debt Ceiling for Dummies

I've been watching the debate over the debt ceiling closely over the past few months. I haven't written about it until now because I'm reluctant to talk about politics, and because the whole thing makes me so angry that I'm not sure I can talk about it intelligently.

My average reaction to debt ceiling news.

But the debate has gotten so bad at this point that I can't keep silent, or I'll end up with a massive ulcer in addition to the intractable GERD. So I'm going to try and tackle this from an educational perspective. I'm going to explain what the debt ceiling is, why it needs to be raised, and why no one in Washington, D.C. can agree to raise it. Hopefully I'll be able to get through this without my heart exploding.

If I get something wrong here, feel free to point it out in the comments, but politely. I read more news than is healthy for me, but I don't claim to remember all of it with 100% accuracy.

What is the debt ceiling?

The debt ceiling was enacted by Congress prior to World War I. Beforehand, each issuance of government debt (i.e. Treasury bonds) had to be approved by Congress individually. To streamline the process, they established a ceiling for the amount of debt the government could incur, which has been raised repeatedly over the decades since.

No other country has a debt ceiling. As a practical matter, Congress dictates the level of government borrowing every year when it passes the budget. However, the debt ceiling has remained in place, if for no other reason than for the minority party in any given Congress to pound their desks over the majority's outrageous spending.

Why do we need to raise it?

The United States spends a lot more money than it takes in. At the moment, the federal government takes in revenues from taxes that total roughly 15% of the our gross domestic product (GDP), and spends about 25% of the GDP. This means we're growing our debt every day.

Back in May, our level of debt reached the debt ceiling. Since then, the Treasury has been engaged in various measures to keep from defaulting on any of our debts, but Treasury Secretary Tim Geithner says that we will begin defaulting on our debt on August 2nd. At that point a whole slew of bad things happen, which might include seeing our country's credit rating lowered, trouble in the bond markets, and a shutdown of many government services, possibly including Social Security payouts.

Why hasn't Congress raised the debt ceiling yet?

As I mentioned above, raising the debt ceiling is always a vote where minority party Congressmen will stamp their feet and raise hell over wasteful spending. This time, though, the Republican party has control of the House, and they're insisting on tying the vote to massive cuts in federal spending. Roughly speaking, they'll only raise the debt ceiling if Congress also reduces spending by the same amount.

To raise the debt ceiling enough to get us through 2013, Congress will have to raise it by about two and a half trillion dollars. Cutting that same amount will require Congress to make painful cuts to Social Security, Medicare, and/or Medicaid.

Couldn't we cut defense spending?

For the most part, no. Republicans are opposed to major defense cuts, and no one else is particularly keen on them either.

What about other parts of the government?

None of them have enough funding to cut to make up the numbers on their own, though many other parts of government (education, EPA) would face budget cuts.

Couldn't Congress raise taxes instead?

That would be reducing the deficit, not spending. Republicans are opposed to any tax increases, even if they're in a ratio of $1 in tax increases to $3 in spending cuts. At one point Republicans indicated they would accept an 85:15 ratio of spending cuts to tax increases, but they've rejected a ratio of 83:17, and are now insisting on 100:0.

What about reforming the tax code to cut out loopholes or subsidies, without actually raising tax rates?

Not good enough. Blame Grover Norquist.

Go on. Blame him.

Norquist heads Americans for Tax Reform, and he's gotten the vast majority of the Republican Party to sign a pledge not to increase taxes. By his standards, that means that tax code reforms that increase revenue by closing loopholes (or ending subsidies to oil companies, ethanol, whatever) can't be passed unless they're offset by spending cuts in the same amount.

In other words, Norquist's primary goal is to shrink the size of government. Shrinking the deficit doesn't matter so much.

Why don't we just raise the debt ceiling and worry about cuts later?

The GOP is adamantly against raising the debt ceiling without spending cuts, and a bill can't pass the House without their support.

What if we get to August 2nd without a deal?

Several GOP House members identified with the Tea Party (including presidential candidate Michele Bachmann) claim that a short default by the United States would not have any long-lasting consequences, despite warnings from economists, rating agencies, and businesses. Additionally, the last time the U.S. defaulted on its debt back in 1979, the increased interest payments on U.S. bonds cost the country billions of dollars. Still, President Obama is unwilling to risk calling the Republicans' bluff.

So how do we get a deal?

With great difficulty.

The initial talks on the debt ceiling led by Vice President Biden came close to a deal of about 2.4 trillion dollars, but ended in a walkout by House Republican leader Eric Cantor over the idea of having some of that come from revenue increases.

After that, President Obama attempted to negotiate a 4 trillion dollar deal in private with Speaker of the House Boehner. The deal would have required tax increases of about 1 trillion dollars, through cutting subsidies and ending the tax cuts passed by President Bush for people making over $250,000 per year. President Obama in turn would have agreed to significant cuts in entitlement programs, possibly including raising the minimum age for Social Security from 65 to 67. The deal was a non-starter for Republicans and never really made it into negotiations.

Currently President Obama is holding daily meetings with Congressional leadership to try and hammer out a deal. He's continuing to push for a 4 trillion dollar deal, which is raising the hackles of Republicans opposed to tax increases and Democrats opposed to entitlement cuts.

Republicans in the negotiations are pushing to revisit the 2.4 trillion dollar Biden deal, but without revenue increases; aides on both sides claim that the actual number without those increases is closer to 1.5 trillion.

Senator McConnell today suggested a plan by which the President could raise the debt ceiling over the course of three to six votes between now and the 2012 elections. This would put all responsibility for the debt ceiling votes on Democrats, and would not guarantee any spending cuts. Reaction so far has been mixed, tilting negative.

So what can we do?

Just kidding.

I wish I knew. I would encourage you to write or call your Senator and Representatives and urge them to raise the debt ceiling, regardless of whether a deal over spending cuts is made. You may want to do that repeatedly. You could also consider shorting Treasuries, but that's unpatriotic and not guaranteed to pay off.

Probably your healthiest course of action is to take a deep breath, count to ten, and try not to worry too much. Whatever deal is reached, it will likely take years to go into effect, regardless of how much you might hate it. A default, on the other hand, will happen on August 2nd with immediate consequences, or not at all. Please, encourage the latter.

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