The Debt Ceiling Myth

We'll only default if Obama chooses to.

Barely have we gotten through the lastest threat of government shutdown with a disgraceful bipartisan deal on invisibly small cuts portrayed as the second coming of Attila the Hun, than a new crisis arises: the unexpectedly fast approach of the debt ceiling.

The debt ceiling is, more or less, America's credit-card limit - and we've been melting down the card for years now.  CNS News reports:

As set in a law passed by Congress and signed by President Barack Obama on Feb. 12, 2010, the legal limit on the national debt is $14.2940 trillion. As of the close of business Tuesday, according to the Daily Treasury Statement released at 4:00 pm today, the portion of the national debt subject to this legal limit was $14.268365 trillion...

This left the U.S. Treasury with the authority to borrow only an additional $25.635 billion before it hits the statutory debt limit.

We've long since learned that statutory limits don't mean much anymore assuming they ever did.  There are any number of wheezes that enterprising bureaucrats can use to get around them, so Mr. Obama's shopping spree can carry on for a few weeks yet.  Eventually, though, the limit will start to bite, and that's when things get sticky - at least, so say the Democrats.

Treasury Secretary Timothy Geithner on Thursday told Republican lawmakers that they would shoulder the blame if the country got too close to defaulting on its debt and roiled markets worldwide by not approving a debt limit increase.  In yet another warning about the perils of not allowing the U.S. to borrow more to fund spending already approved by Congress, Geithner said it would be deeply irresponsible for lawmakers to use debt limit negotiations for political gains. Congress must agree to raise the $14.3 trillion debt ceiling or the legal amount that the country can borrow.

What Secretary Geithner is saying here is that we have to raise the debt ceiling (credit limit) so we can borrow more money to pay the minimum payments on our other credit cards.  If we don't, all the credit cards will go into default, get suspended, and the interest rates will skyrocket.

As all too many Americans have found out, that is indeed the way it works, and Geithner would be right - if America were in the position of the unemployed.

But it's not.

Democrats at work.

Spendthrifts, Not Impoverished

When you're an ordinary person who is unemployed, you really have no alternative but to do whatever it takes to keep the lights on and obtain enough cash to keep things moving.  Some bank is foolish enough to offer you a larger credit line?  Of course you'll take it, and use the money to meet minimum payments on your other debts so they don't shut down either.

Why is this rational?  Because you don't expect to be in this situation forever.  You're buying time, hoping that you'll find a new job and be able to get back on track.  Most of the time this works.

What if it doesn't, as has happened to all too many Americans during the Obama depression?  Then everything collapses.  Your house gets foreclosed, you lose your car, your credit cards are shut off, and you're out on the street.

That's what would have happened anyway if you hadn't run up extra debt; you can't live on nothing.  So, given long-term unemployment, a little more debt makes no difference - the time it buys might see you in a new job, and if not, you're no worse off than you were going to be anyway.

That is not the situation our government is in - not in the slightest.  The American government is not unemployed - it still collects trillions in taxes and fees with money coming in every single day.  The American government has no serious prospect of massively increased income - as we've seen, the government already collects as much cash as it's possible to extract from an economy our size.

Could taxes be raised?  Of course they could, but the actual dollar amounts collected would go down, as Candidate Obama knew full well and as Maryland's grossly counterproductive wealth tax recently illustrated.  What matters is cash in the door; tax increases are no help there.

No, America is not like a temporarily unemployed and indebted family.  Instead, America is like the late Michael Jackson - someone with a truly massive income, but even more outlandish spending that he's lost all grasp of.  You can make $1 million a month and be considered rich, but if you are spending $2 million a month you'll wind up in trouble eventually.

What's happening in Congress right now is like what would happen in that sort of wealthy, spendthrift family.  The husband looks at his large paycheck and even larger bills and tells his wife she needs to lay off on the jewelry for a while.  The next day he comes home and finds the maids unloading a truck from Saks Fifth Avenue.  Not helpful!

Then, he gets the credit card statements and discovers that they are all maxed out and his bank balance is at zero.  Yes, he knows that his very large paycheck will be arriving shortly, but it's nothing like enough to pay them all off; and then the wife announces a big sale at Barneys and demands that he call Amex for a credit limit increase.

What should he do?  The proper course, as most Americans instinctively understand, is not to raise the credit limits.  Instead, stop spending; use your still-healthy paycheck to make minimum payments; and, over time, pay down the debt.

Who Has the Gun?

Barack Obama, Tim Geithner, and the Democrats are in the role of the wife in our little example.  They are pointing out, accurately, that we don't have the money to pay all our bills.  They are pointing out, truthfully, that we've reached our credit limit and something must be done.

In blaming the Republicans for the chaos that would ensue if we don't raise the limit and don't make our minimum payments, however, they are lying and defrauding the American people.  There is plenty of money coming in from taxes to pay our loan interest, if we would stop spending it on other things!  Sen. Pat Toomey explains the truth:

Next year, about 7 percent of all projected federal government expenditures will go to interest on our debt. Tax revenue is projected to cover at least 70 percent of all government expenditures. So, under any circumstances, there will be plenty of money to pay our creditors.

Moreover, as the Congressional Research Service has noted, the Treasury secretary himself has the discretion to decide which bills to pay first in the event that a cash flow shortage occurs. Thus, it is he who would have to consciously, and needlessly, choose to default on our debt if the debt ceiling is not promptly raised upon reaching it. It takes a lot of chutzpah to preemptively blame congressional Republicans for a default only he could cause.  [emphasis added]

The cash is there; we merely need to write the check to pay the mortgage instead of paying the jewelry store.  The Democrats refuse to do this.

It is not the Republicans, but the Democrats, holding a gun to America's financial head by preferring to pay off their special interests instead of our lenders.

Yes, an immediate and forced budget balance would be awkward and unpleasant.  Yes, it would involve deep and severe cuts, far more harsh even than Paul Ryan's proposal.  But it is a simple mathematical fact that we do have the money to meet our immediate obligations if only we'd stop taking on more obligations and debt with each passing minute.

If our rich but spendthrift family is not to find themselves out on the street one day, the husband has only one choice: take away his wife's credit cards and put cottonballs in his ears while she screams.  She may run around smashing crockery and tearing at the draperies; so be it - her actions are not his fault, but hers, no matter how she tries to blame him for them.

As painful as it will be, that is what the Republicans must do - or go down with the ship and shoulder the lion's share of the blame.  We expect Democrats to spend money foolishly, but we don't expect Republicans to let them do it.

Petrarch is a contributing editor for Scragged.  Read other articles by Petrarch or other articles on Economics.
Reader Comments

Very well explained. The analogy of the rich husband/wife is perfect. It's not that "we're out of money!" as a lot of conservative pundits like to shriek. We have plenty of money - we're just spending far more than we earn.

April 26, 2011 1:16 PM
Add Your Comment...
4000 characters remaining
Loading question...