Sunday, May 1, 2011

A Solution to the Debt Ceiling Non-Crisis

Our nation is facing a crisis. If you want to understand the nature of our fiscal crisis, consider: We increased Federal spending by over $1 trillion, from 2007 to 2011, per annum, from $2.5T budget to $3.8T budget, increase the Fed governments share of GDP from 19% to 26%, and quadrupled the Federal deficits, from about $300 billion in 2007 to $1.6 trillion by 2010 and 2011. That $1 trillion in increased spending went to Medicare, Medicaid, more domestic discretionary spending, some increment in defense spending and various “stimulus”. Redistribution, corruption, and padding the government sector payrolls and spending that did little to increase our wealth. It wasn’t paid for by expanding revenues, since we’ve had the worst 4-year economic performance in a generation, with flat tax revenues. So it all fell down to a $1 trillion increase in deficit, that expanded our national debt by almost $5 trillion in 4 years.

Now, because of that profligate behavior, we are facing the statutory debt limit and need to raise it to keep the Government operating and paying its bills. It can only pay its bills beyond the next few months by issuing ever more debt. Republicans have demanded fiscal reforms as the price of a debt ceiling increase: A balanced budget amendment, spending caps, and deficit reduction plans. Obama and his allies have stunningly refused to agree to those terms, and Obama responded to Republicans proposals with a highly partisan budget speech that outlined his own ‘cuts’ that manage to continue large spending increases and massive deficits for years to come. No wonder the public trusts Republicans more on the budget.

There are claims that if we don’t increase the debt ceiling with no preconditions now, we will go into default. Those claims are spurious. The only way the US defaults is if the Obama administration chooses to. They can always put interest payments at the head of the line. They can always defer medicare reimbursements, ag subsidies, etc. We have the revenues to continue to pay any and all debt and interest obligations. The Obama administration knows this. And further, it would surely move the poll numbers if the checks that are stopped are social security payments. The problem would be solved in a matter of days. But for the Obama admin to do the sensible thing like that would be to actually navigate in a way to smooth the crisis, not inflame it . They seek to inflame it. This is why they are making such a big demonstration about the apocalyptic nature of the debt ceiling raise.

Thus, we are treated to apocalyptic visions of a phony crisis, while the real crisis – the impending fiscal meltdown of the U.S. government – is swept under the rug.

As for real solutions to the real crisis, let us remember: Congress appropriates. Oftentimes, liberals will cite Clinton’s success in the 1990s, forgetting that it was the GOP Congress of 1994-1998 that balanced the budget via their budget bills. Forgotten also that we went through a Government shutdown to get to that point of serious fiscal responsibility. More importantly, the Gingrich Congress did it while cutting taxes, not raising them.

We can only rebalance our budget and economy by cutting that $1 T in spending. Do it slowly and you will burden our children with trillions in extra debt in the meantime. Do it fast – well, don’t worry about that, Washington had a hernia just cutting a measly $38 billion, so truly significant cuts, like cutting $500b in one year, wont even be on the table. We will end up cutting far less than we need to do – sorry, kids.

The most aggressive budget plans on the table, like Rand Paul’s budget proposal, will take 8 years to get us to balance. Yet, even the “kinder, gentler” path to fiscal responsibility outlined by Paul Ryan, and pushed by the House Republicans, is being called “radical” by President Obama. The Ryan plan spends in the range of $3.5 trillion every year for the next 10 years, not much more, not much less. The Ryan plan deliberately leaves all seniors alone, so as not to cause those on Government benefits already to lose what they have. It defunds Obamacare, but maintains other entitlements, and reforms them in the long-term. Only in Washington are tiny cuts of less than 1% of outlays called ‘historic’ (when in fact in both the last 1940s and the early 1920s, the Federal budget was cut by more than half). And only in Washington can you look at a Ryan budget that continues to increase Medicare spending in each and every year and call it not just a cut, but, as Democrat politicians claim, “ending Medicare as we know it”.

What we have here is the early peek at 2012 politics. Obama revamped his own budget and proposed his response to the Ryan plan: Higher taxes by ending the Bush tax rates, throw in more higher taxes, continued deficits in a plan that would spend close around $40 trillion over the next 10 years. 4 trillion more than the Ryan alternative. So, that’s the choice: Higher tax rates, higher spending, and higher deficits, versus a somewhat lower spending and “NO” to higher taxes. This sorry situation is a consequence of the folly of the massive overspending of the Democratic Congress of the past 4 years, and the ‘spend-it-all’ mentality. $5 trillion in extra debt and all we got was a lousy “We are all Keynesians now” T-shirt.

Which gets us back to the debt ceiling debate. There are many in Congress who are saying “I will only raise the debt ceiling if we have a serious plan to cap spending and cap deficits”. That is exactly the right approach. End the blank checks and the trillion dollar deficits. When you have a 4 trillion difference in a 10-year spending roadmap, the debate can only be reconciled with elections, and the House Republicans are right to treat their November 2010 as a mandate for fiscal responsibility. Hence they are adamant: No increase in the debt ceiling without a significant commitment to fiscal responsibility. The vehicle for that for many in Congress is a balanced budget amendment.

They are being faced with non-serious claims of calamity should the debt ceiling not be raised: “We will go into default” Only 7% of our spending in the short term is interest payments, and tax revenues cover that many times over. If we simply put interest payment at the head of the line, no default will ever happen. “the treasury market (and all other markets) will panic” Well, buy on the dip. Fools will panic. Grownups will recognize this for what it is – political gamesmanship in Washington. In 2005, Obama and a lot of other Democrats said many things and voted against the debt ceiling increase, contradicting everything they are saying now.

We were told in 1995 the Government shutdown was a ‘crisis’ – and after 3 weeks of a Government shutdown, the folks in Washington got their deal put together. The GOP got their deficit reduction, and Clinton got his reelection campaign talking points. Then a snowstorm shut the Government down for another week, proving that maybe, just maybe, the world can survive for a few days without the Federal Govt after all. Last year, the Democrats didnt even pass a budget – first time in a generation – amazingly, the Government never even batted an eye, as for the first time in a long time, half the year the Government was run on continuing resolutions. Last month, the world was supposed to end over a Government shutdown. Well … no. It didn’t.

Just like cutting up a credit card forces a family to start changing it’s behavior, not raising the debt ceiling is a ‘cold turkey’ approach to ending deficits, and an induced ‘crisis’ over Washington’s failure to agree on time may actually do some good. The real crisis is the Federal Govt’s failure to live within its means. The consequence of that real crisis is the growing debt, and that is becoming a burden on the whole country. Washington cannot and will not go cold turkey on deficit spending, but surely needs to do something.

So there are two solutions. The first is for the Obama administration to acknowledge what needs to be done anyway and agree to measures for fiscal responsibility in the debt ceiling increase. If a BBA is passed as part of the debt ceiling increase, at least some good will come out of it. The second solution is an incremental approach that increases the debt ceiling by a ‘small’ amount of $100 billion in exchange for some portion of the necessary budget reforms.

In the end, default will be a choice the administration makes out of their unwillingness to spend differently and come to real agreement with Congress on necessary reforms. In short, the only reason the phony crisis will become real is if the Obama administration refuses to address the real crisis – that we only take in 60 cents for every dollar we spend. If the path towards getting a real solution to this real problem is a game of chicken over the debt ceiling increase, so be it. As Rahm Emmanuel said, never let a good crisis go to waste.

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Danial123 said...

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