Trying (Again) to Explain the Debt Ceiling Vote
What are the options regarding the debt ceiling?
As I noted in the comments of another post, when it comes to the debt ceiling there are only two options:
1) Vote to raise it.
or
2) Default.
There is no other choice here. It is that simple. And, I would note, defaulting would have serious economic effects. As such, I am in favor of raising the debt ceiling because, really, it is an arbitrary number to being with (and therefore a foolish thing to fight over, especially given the stakes) and the consequences of not raising it are problematic (to say the least).
Yes, I understand that the vote on the debt ceiling itself present an opportunity for the politics of brinkmanship, and therefore at least the possibility of producing some sort of agreement over future spending.
All well and good, but for the brinkmanship to actually work, the negotiators have to all be willing to go over the brink. This strikes me as irresponsible, especially given where the economy has been the last several years. It is especially vexing, because we need to establish predictability in the economy so as to encourage investment (and the current fight hardly instill confidence and predictability).
Further, I stand unconvinced that a good and efficacious long-term policy vision for dealing with long-term deficits is going to emerge over the next two-plus months in this type of context. Perhaps I will be proved wrong. We shall see.
Of course what I really want I am unlikely to get: Congress acting responsibly in regards to the debt ceiling in the short term and in regards to fiscal policy over the long term.
But, please, please, please: everyone needs to stop pretending like the vote on the debt ceiling itself effects the deficit or the debt. It does not. So, please stop arguing like it does.
And while we are at it: could we please stop acting like the Gods-of-Economics-and-All-That-is-Good-and-Proper set the current debt ceiling? Let us recall: the current debt ceiling (like all debt ceilings before it for the last almost 100 years) was the result of political wrangling on the floor of the US Congress, not as the result of some logically constructed, empirically tested formula.
You will see that the same day that pink elephants ride down Constitution Avenue on the backs of unicorns handing out gold coins along the way
@Doug:
I think I saw that once in NOLA, however.
Steven, what do you make of this?
As Heritage expert J.D. Foster, Ph.D. noted in his January 2011 paper “Congress Has Time and Options on Debt Limit“, Congress had time to discuss how it wants to proceed on the debt limit. Secretary of the Treasury Timothy Geithner’s letter of April 4, 2011 estimates that the Federal Government will not reach the statutory debt limit before May 16, 2011 and that the Treasury can use special measures to extend that date to about July 8, 2011. Thus, it remains clear that Congress has sufficient time to proceed carefully and deliberately in deciding how to best take advantage of the debt limit situation to help bring Federal spending and borrowing under control.
While Secretary Geithner’s letter makes clear that Congress has more time, the letter also raised once again the bogeyman of a default on the Federal debt. As Dr. Foster’s paper demonstrated, there will not be a default on the Federal debt when the Treasury reaches the statutory limit on its borrowing of $14.294 trillion. The Treasury just will not be able to borrow any more money. The Treasury would still pay debts that come due, putting off temporarily payment of less important obligations as necessary to pay the maturing debt. Of course, the hope is that conservatives in Congress will be able to persuade a majority of the Senate and President Obama to enact a law that takes strong steps to curb spending and borrowing and starts to get the debt under control, but there is no guarantee that the Senate majority and the President will not force a debt limit crisis instead.
If the Obama Administration is serious about getting spending under control and about maintaining orderly financial markets, Secretary Geithner needs to help guide his colleagues at the Office of the Management and Budget and in the White House toward near-term substantial reductions in Federal spending, including for entitlement programs, and long-term solutions to ensure that the Federal Government never spends itself again so deeply into debt that it cannot effectively manage its way out.
Actually, I meant to underline this part:
Sorry, but that’s not correct. There is sufficient tax revenues coming into the Treasury to pay off past debts as they come due. With the current cash flow, there would be insufficient money left for current spending which is why the cut in spending is so important but the point here is that there are more options than the two you present.
How about…
3) Print more money
Since our debt is in dollars, and dollars are backed by nothing more than the full faith and credit of the US Government, this would seem possible — an orderly devaluation of our currency. Not good, but then neither is defaulting.
What actually prevents us from doing this?
It might help if we defined our terms. As I understand it “default” means “stop paying interest on the debt”.
Can a country with a fiat currency default? Other than deliberately and with the intent of defaulting?
@Dave:
A legit question, but it is unclear to me that we could simply start printing money at this point (and yes, I am aware of QE and QE2). But I don’t pretend to have an answer on this count.
Oh, we could. The question is should we?
Truth to tell I think that answers the implicit question that opens your post. There is another option: we can print more money.
Printing money doesn’t solve anything, it only brings on hyperinflation which is even more destructive.
James Pethokoukis disagrees. And he’s not as easily dismissed as I am.
As long as we’re quoting the wisdom of The Heritage Foundation maybe we should look at their track record. Here’s a blast from the past:
http://www.heritage.org/research/reports/2001/04/the-economic-impact-of-president-bushs-tax-relief-plan
How’d that work out for ya? Now, before someone brings up the obvious excuse that 9/11 happened, well, yes, it did. So why didn’t we alter our plan a bit at that point?
So does borrowing. Hyperinflation is precipitated by a loss of confidence in the currency. There more than one way to destroy confidence. Not raising the debt ceiling, borrowing too much, or printing more money could all do the trick to trigger hyperinflation. Or none of them might be enough.
Dr. Taylor, I’m not being mindlessly obfusatcing or obdurant. The disconnect between spending and the authority to borrow is at the root of the problem we have. Instead of an executive administering a budget approved by the Congress we have two political parties and two branches of government trying to outpace each other to be Santa Claus. Raising the debt limit for no other reason than we hit it is enabling the spenders to do more damage. Raising the debt limit as part of a larger plan to get debt under control makes some sense. As Mr. Pethokoukis states in his article, there is no reason to panic and raise the debt limit immediately, and if Treasury Secretary Geithner adopts the standard political tactic of taking the most obviously painful and deleterious actions first, it is merely another reason to fire him now, and his boss at the first opportunity.
Sorry, meant obfuscating in the previous post.
@Charles:
I will read the piece.
However, I have read and heard a large number of people who know what they are talking about, both in and out of government and from multiple perspectives who all agree that not attending to the debt ceiling would be anything from highly problematic to disastrous.
Since you usually like small business-related examples: what would happen to a company if it was unable to get a line of credit to meet payroll, pay the bills and so forth?
Dr. Taylor, oh the stories I could tell…
If the debt Ceiling is arbitrary and meaningless, then why raise it?
There are only two options? Please. How about we stop paying more than we take in and start paying off debt as an option? Just because you don’t like an option doesn’t mean it doesn’t exist.
“But it would be hard to do”. Just because it would be hard to do doesn’t mean it can’t be done.
Many claim that it would be irresponsible to not raise the debt ceiling. It is irresponsible to keep spending at the outlandish levels we are currently spending now. Why not be responsible and do both instead of kicking the can down the road? The “well we will do it later” is a piss poor excuse for not acting responsible now.
Steven
Isn’t there a large number of people who know what they are talking about, both in and out of government and from multiple perspectives who all agree that not attending to the national debt would be anything from highly problematic to disastrous?
Why not take care of it right now instead of years if ever down the road?
@Wayne,
You are certainly entitled to your opinion, but I simply don’t think you understand what you are talking about.
I’m not all that concerned that the debt ceiling won’t be raised. One, because if delays in raising the ceiling ever got to a point where it would seriously threaten the economy or markets, our business and financial communities wouldn’t stand for it. Two, because the political consequences of the cuts that are needed to avoid raising the ceiling are so dire. There’s a reason that neither party has gotten behind a plan that would avoid the need to raise the ceiling. It’s called survival.
The big questions are who is going to blink first, what sort of forced “compromise” is going to come out of this, and (from the political point of view) who is the public going to blame?
Dr. Taylor,
You should quit now. It is obvious that debt ceiling-erism has taken over where birtherism left off. You can’t win an argument against an article of faith, as I have taught my composition students now for about 15 years.
@A voice:
Methinks you have a point.
“But it would be hard to do”. Just because it would be hard to do doesn’t mean it can’t be done.
—
yes, it would be, but i see a lot of glossing over of what ‘hard’ would really mean. it would mean grave, real-world impacts on a significant number of people. i understand the libertarian argument in the abstract, and concede that business as usual is unsustainable, but ill never be able to reconcile the ideology of libertarianism with the real world its real world implications.
to simply say ‘stop the spending’ ignores the system we have, in favor of the system we wish we had, lamentable though it may be.
Given the recent fondness for raiding pension funds (clearly contracts with workers are meant to be broken…), I’d rather have seen a government shutdown today than the emergency measures of borrowing from federal pension funds.
Perhaps I am just paranoid, but I question whether this money will ever be paid back, and I suspect this is part of the Republican plan.
Ronald Reagan, November 1983 I miss The Gipper sometimes
I see a contradiction here. Not raising the debt ceiling, according to you, leads to hyperinflation. But raising the debt ceiling allows more borrowing which, according to you, also leads to hyperinflation.
You can’t have it both ways.
“Perhaps I am just paranoid, but I question whether this money will ever be paid back, ”
See if this helps you to put things into perspective. At this very moment, the State of Washington–which in the 80s adopted laws permitting the government to seize interest beyond the normal rate of bank return in the state pension funds and replace it with bonds–owes those funds some $27 billion (with a “b”). Some conservative are calling for the state to simply announce that they will never repay that money because it is not really OWED to anyone.
Authorize greater levels of debt that can never be paid back short of terrible inflation, demogogue any and all spending cuts while Medicare is going broke in 13 years, Social Security is already spending more than it takes in, and interest on the debt is going to be crushing once the free money era is over.
But I’m the loony.
Why are Republican plans to cut spending always ass-backwards?
First it was cut taxes to cut spending. That obviously didn’t work.
Now they want to cap the debt limit. That does nothing to reduce spending. It’s the old 3 part plan:
1) “cut tax” or “cap debt”
2) magic happens
3) balanced budget
Why, oh why, if they want to cut spending isn’t that their issue? Name the cuts, and campaign for them in forums such as this. Seriously.
.. but don’t bother me with ass-backwards demands that are only supposed to magically lead to reduced spending in some unspecified way at some unspecified time in the future.
Re “but I simply don’t think you understand what you are talking about”
This is from someone who can only think of two options? You may want to look on the mirror on that statement.
Re “You can’t win an argument against an article of faith”
There goes that looking in the mirror deal again. The sky is falling if we don’t raise the ceiling people main arguments are. “I know what I’m talking about (vision) you don’t” and “this is the way it has always been done so we must stick with tradition”.
Ask a simple logical question like “why not change our harmful ways” and you get “you just don’t understand”. Which side is using articles of faith?
@Wayne:
When it comes to the debt ceiling vote, the potential are clear: ceiling is allowed to go up, or it isn’t. If it isn’t, then default (unless, I suppose, as Dave suggests, we just print money to pay the debt anyway).
The whole point that I am trying to make is that there are not a lot of complex options to be associated with the debt ceiling vote.
We you say things like “How about we stop paying more than we take in and start paying off debt as an option?” and pretend like that option has anything to do with the debt ceiling vote, you indicate that you appear not to understand the topic at hand. That may well be something we should do, but it would result from either a yes or a no on the debt ceiling vote.
I’m sure you already know the answer to that, John: Because spending cuts, outside of those cuts specifically targeted at groups that don’t vote for Republicans, anyway, are unpopular. Tax cuts, on the other hand, are popular with pretty much everyone.
No, because they want the Democrats to get (or at the very least, share) the blame for the spending cuts and tax increases that will be needed.
Re “and pretend like that option has anything to do with the debt ceiling voter”
Are you saying that budget cuts and budget reform can’t be tied to raising the debt ceiling?
Talking about not understanding the topic.
Re “ceiling is allowed to go up, or it isn’t”
No it can go up with or without cuts in spending. It can go up with or without budget reform. If it doesn’t go up, debt still can be paid with some of the revenue coming in but future spending would need to be cut. Just to be clear for some of you. Future spending is any spending that has not been spent. Future spending that was agreed to is not the same as money already spent. Regardless there are more options than just simply the ceiling is allowed to go up, or it isn’t”.
@Wayne:
Yes, one can attempt to leverage the situation into a side deal. Indeed, as I wrote above:
But when it comes to the actual debt ceiling itself, the above options are the options.
Next Steven will say that all votes in Congress are either up or down. That nothing including votes on other bills or amendments are ever tied to any vote. You either vote for it or against. No wheeling and dealing involved.
@Wayne:
If you are going to get involved in a competition about who understands what, it is best that you pay attention to the post that was written if you are going to argue about said post.
Steven beat me to it. He did that all votes in Congress are either up or down
Steven besides default and raising the debt, isn’t it a possibility to paid the debt with some of the revenue coming in and cut future spending?
More on lack of understanding:
This is technically true. but only if you shut down a rather substantial part of the government (and I mean truly shut it down). This has a variety of serious ramifications for the economy.
You aren’t doing a very good job of convincing me that you understand the subject at hand.
Steven keep with your faith because you sure are not convincing me that you understand the subject at hand either.
The best option is to raise the debt but with spending cuts and budget measure tied to it. That is what we all should be supporting.
Of that fact, I have little doubt,
Of course, Wayne, since the whole post is about using the debt ceiling to play chicken to force a deal, how is that you don’t understand that that implies the ability to make a deal?
Indeed, I notice you utterly ignored the quote from the post the I gave you above.
“Either” as in not convincing me you understand not that I don’t understand. Nice sharpshooting though.
As for your quotes, it looks like we were posting over each other. I have more than one thing going on at one time. Sometimes I have more time to spend on a post while waiting for some things to get done than I do at other times.
Yes you said very half heartily that “debt ceiling itself present an opportunity for the politics of brinkmanship”. However than you state “and pretend like that option has anything to do with the debt ceiling voter”. You quickly acknowledge a fact then pretend it doesn’t exist in another statement. Not consistent. Also the brinkmanship takes two sides. Another option would be for politician to do what they know needs to be done and that is addressing the deficit. Please don’ go off on the B.S. that deficits and Debt ceiling have nothing to do with each other. Granted it won’t happen. However those not willing to deal with the overspending should be chastise even more than those that do.
Throughout your post you do not seem to support the option of raise the debt but with spending cuts and budget measure tied to it. Am I wrong on that?
A little bit of repeat but I suppose it comes down to these questions. Do you support using the debt ceiling to get spending cut and budget reform deals or not? And if you are that concern with raising the debt ceiling either side, are you willing to give up some things to get it?