Saturday, January 12, 2013

Some much needed perspective on the debt ceiling debate

Ever since the fiscal cliff was averted postponed, the media's political coverage has shifted to the newest upcoming budget battle: the debt ceiling.

For those of you who don’t know what this is, let me catch you up to speed. The debt ceiling (also known as the debt limit) is a piece of legislation that limits the amount of money the US federal government is allowed to borrow. The idea of this legislation is to check each generation’s ability to saddle its expenses on the next, and to ensure the government keeps its fiscal house in order. As Greece recently demonstrated, accruing too much debt can have calamitous economic consequences, so the debt limit is designed to prevent that from ever happening here. As a result of this legislation, the maximum amount of money the government is allowed to spend in a given year is equal to the sum of government revenues plus the cumulative debt ceiling, minus whatever outstanding debt there was at the start of the year. If the government ever promises to spend more money than this figure, it must either raise revenues, raise the debt ceiling, or break those promises. Breaking those promises is called a “default” on our debt, and it means we can’t pay the people we agreed to pay. Not only is defaulting immoral, but it’s also bad for America’s credit rating because it proves the government is broke and dysfunctional (and, therefore, a shaky investment). When the credit rating goes down, borrowing becomes even more expensive because the interest rate goes up, which doesn’t make the task of lowering the debt any easier. For these reasons, (and also because it shows our leaders are inept) neither party really wants the US to go over the debt limit.

Since the its creation in the early 20th century, the debt ceiling has been raised dozens of times with very little fanfare. However, with the unprecedented debt accrued by the government over the past decade becoming an issue of political contention, the government almost went over the debt ceiling in the summer of 2011. At that time, the preferred Democratic solution was to simply raise the debt ceiling to whatever would cover our expenses, or to raise tax revenues. Meanwhile, House Republicans wanted to use the leverage provided by the debt ceiling to enact spending cuts. Eventually, Republicans agreed to allow a raise in the debt ceiling on the condition that 1.2 trillion dollars of spending would be cut.

However, as is too often the case, the bipartisan task force assigned with making those cuts never wound up cutting a dime of spending. As per the law, those cuts were postponed to January 1st, 2013 (to be enacted by sequester). This set up a “fiscal cliff”, which politicians were scared of because it would cut specific programs across the board (and thus actually fulfill one of their promises). The recent fiscal cliff deal postponed these cuts for another two months, when the US will once again surpass its debt ceiling. At that time, some minute portion of those same cuts will doubtlessly be re-offered to Congressional Republicans in exchange for even further concessions. Unbelievable, isn’t it?

Anyway, both parties are currently gearing up and strategizing for this inevitable confrontation. How does each party propose to solve the situation? Fiscal conservatives think the debt ceiling serves a worthwhile and necessary purpose, while progressives view it only as an impediment to their designs for perpetual spending increases. The conservative solution, therefore, is to simply cut spending by however much is necessary to bring federal borrowing within the legal limit. By contrast, the liberal proposals are much more complex – and preposterous. I would like to rebuke the two most prominent Democratic proposals being floated around, but I’ve decided to do so in two separate posts to isolate the issues. You can find the links to these separate posts below: (hyperlinks will appear when the post is completed)

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