Welcome to the new year and to our next round of economic/political brinksmanship; i.e. the fight over whether or not to raise the nation’s debt ceiling. To understand what this “fight” in over, some basic information needs to be put forward so follow the bouncing ball.
First, recognize both the relationship AND the difference between our deficit and national debt. The former is the amount of money we spend in a given budget cycle that exceeds the amount of money taken in during the same period. The national debt is the aggregate of all our deficits. So each time we run a deficit, we add to the national debt. That we now have what the president has aptly termed an “unsustainable” national debt is the result of government spending that included two wars, massive tax cuts that never paid for themselves, the expansion of Medicare (Part-D), the Troubled Asset Relief Program (TARP), and the Obama stimulus, ALL paid for with borrowed money.
Second, suppose a budget is passed with a deficit so that we have to borrow money to make up the difference between the projections for spending and a revenue shortfall. When the Congress (especially the House) passes that budget with the attendant borrowing, it commits our nation to making good on that extension of credit from our lender(s). Up until about a year ago, that commitment was honored by Congress simply voting to increase the debt ceiling. In other words, Congress had always agreed to pay up the money we had already borrowed.
What happened several months ago is that a sufficient number of conservative members of The US House (notably with a Tea Party affiliation) refused to allow our government to make good on that debt unless there were cuts in future spending. To better understand the insanity of this gambit, consider the following analogy: Given that we get money from a lender but then refuse to pay it back unless future spending is cut. The lender says “What you do about future spending is not my problem. I simply want my money. If you refuse to pay it, I’ll tell the world that you’re a very bad credit risk in which case, the next time you need to borrow, you’ll get charged a higher interest rate because that’s the way we lenders treat people who default on loans”.
Given all of the foregoing, you now have an understanding of how the first debt ceiling fight came about. It was resolved only after a deal was reached that contained the particulars that defined what came to be called the “fiscal cliff” i.e. a rolling back of all income tax cuts and massive reductions in government spending. The idea behind this deal was that these changes were so severe that Congress would promptly take action to achieve thoughtful, sensible means of attaining deficit reduction. Unfortunately, with an election year upcoming, that was far too much to expect from either party. So, as the final minutes of the proverbial “eleventh hour” ticked away, both houses of Congress passed a short-term, stop-gap measure that left spending cuts to be deliberated over this February. This set the stage for the next (second) fight over the debt ceiling.
Once again, the same conservative members of Congress have vowed to block payment of our bills, unless they get draconian cuts in spending as part of the next budget. The president has been just as adamant in asserting that he will not have this same fight again and put our country’s credit rating on the line. He has agreed to negotiate cuts in spending, but only after the debt ceiling has been raised. So, the battle lines have been drawn and that is where we stand as of the date of this blog.
Finally, there is no question that we must reduce our deficit. Every reputable economist in sight has said that this has to happen through a combination of increasing revenues while reducing spending. To a large extent, the former has been achieved by raising taxes on every dollar a person makes over an agreed-upon $400,000. threshold. But what spending is to be put on the chopping block? Should there be a big scaling back of entitlement programs like Social Security and Medicare? How about defense spending? Can we save money by getting out of Afghanistan ahead of schedule? The answers to these and similar questions will only be found through careful deliberations that are free of over-heated rhetoric that is driven by hyperpartisan ideology that pays no attention to evidence and facts.