I saw on the news the other day that 38% of Americans think that refusing to raise the debt ceiling is a good idea. Fortunately they are somewhat outnumbered by those who think it’s a bad idea. But 38% is a pretty large minority opposing a routine fiscal measure that most economists see as essential. I suspect that the 38% consist mostly of people who don’t understand the relationship of the debt ceiling to the fiscal workings of our government.
Here’s a quick quiz consisting of one multiple-choice question: Raising the debt ceiling is essentially the same as (a) increasing spending, (b) increasing the federal deficit, (c) funding Obamacare, (d) all of the above, (e) none of the above.
Let’s consider each alternative. Answer (a) is wrong because what forces the government to borrow is a budget deficit, and the government still has a deficit even when spending is falling, as it has been as a result of the sequester. But answer (b) is wrong too, because the annual deficit doesn’t have to be increasing in order for the total amount of debt to rise. Any deficit, even a shrinking one as we’ve had recently, adds to the national debt. The only way to hold debt constant is to run no deficit at all, and neither party has proposed a budget that comes close to achieving that immediately. Most economists wouldn’t like it if they did, since the massive tax increases or spending cuts required would be bad for the economic recovery.
Answer (c) is the most irrelevant of the bunch. The Affordable Care Act is to be funded through cost savings and tax increases, especially on the wealthy. It isn’t contributing to the current deficit, and so it has nothing to do with raising the debt ceiling. The correct answer is (e) none of the above.
Raising the debt ceiling from time to time is simply a logical consequence of running budget deficits. Since the budgets proposed by both parties include deficits, raising the debt ceiling should be a no-brainer. It’s simply permission for the Treasury to borrow the amounts needed to fulfill the legislative commitments that Congress itself has already made. The implications of not doing so are huge. The United States has never defaulted on a fiscal obligation. Through all of our budget problems and battles, the United States Treasury has remained the global model of a sound financial operation. The Treasury bond is the world’s safe haven in good times and bad, and the short-term Treasury bill is described in financial textbooks as the closest thing on earth to a risk-free investment.
Why in the world would either party want to put the “full faith and credit” of the United States of America at risk? I can think of only two reasons. The first is to score points with a public that mistakenly associates raising the debt ceiling with (a), (b), or (c) above: raising spending, increasing the deficit, or funding Obamacare. One party can make a big show of fiscal responsibility by refusing to raise the debt ceiling, instead of making the tough and often unpopular choices about taxes and spending that responsible budgeting requires. The second reason is even less responsible: to threaten damaging the nation in order to have one’s way in budget disputes.
Imagine a married couple arguing over money issues, so one spouse threatens not to make the mortgage payment unless the other gives in. That’s pretty irrational, since the household’s failure to meet its obligations will damage its credit rating, put its home at risk and hurt both partners. Now some people might regard the threat itself as a useful tactic to achieve a legitimate objective, like trying to rein in a partner’s excess spending. But even if making threats one doesn’t really intend to carry out is a good bargaining tactic–I personally don’t think it is–this argument assumes that the party making the threat is clearly in the right. In the case of federal fiscal policy, this is far from clear. One thing that makes the situation there very different is the power to tax, which complicates the fiscal options.
In the recent debates over the deficit, the Democrats have generally advocated a combination of spending cuts and tax increases, while the Republicans have generally advocated a combination of deeper spending cuts and tax reductions, as in the Ryan budget plan. Without getting into all of the economic arguments for one or the other, we can at least say that the Democratic approach is not obviously less reasonable than the Republican. In theory, Democrats have just as much right to threaten default if they don’t get their way on taxes, as Republicans have if they don’t get their way on spending. Why should either party be able to win by threatening to make the Treasury default on its obligations? Why is it only Republicans who try to get away with this? I don’t think it’s because their position is so obviously right; I think it’s because they are so righteous! Many Republicans have become so convinced that they are saving the country from socialism that they believe that they must win by any means necessary (although hopefully not including violent means). We know from history that people on the Left are fully capable of taking similar positions. But right now the bullies seem to be mostly on the Right, for historical reasons that are best left to some future post.
As of this writing, the Republicans appear to be ready to attach partisan conditions to any resolution to raise the debt ceiling. As with the government shutdown, President Obama will have to choose between caving in to irresponsible tactics, or standing firm and being accused of not negotiating. No matter who wins, the democratic process seems to be losing, and maybe the economic strength of the nation as well.