I would like to talk today about the debt limit crisis that is currently going on. Just to give some background: The United States Constitution gives the Congress the power to issue debt and borrow money on the credit of the US Government. From the founding of the US until about 1917, whenever the government wanted to issue more debt, Congress would take a vote on it, and they would approve each specific debt issuance.
In 1917, the US became involved in World War I. And in order to allow the government a little more flexibility to finance that involvement, Congress passed what was called the second liberty bond act of 1917. This act changed the way Congress authorized debt. What it did was establish a limit on the total amount of debt that could be issued. And the US Treasury was authorized by Congress to issue whatever debt they deemed necessary to fund government operations. And in exchange for this flexibility, Congress established the debt ceiling or debt limit. So, the Treasury Department had the authority to issue debt on the credit of the United States, so long as it did not surpass the debt limit set forth by the congress.
So the issue now is whether or not Congress should once again vote to raise the debt ceiling. We are currently scheduled to hit our current limit on August 2nd of this year. And our current limit is about $14.3 trillion.
Now there have been debt limit votes in the past, and they have been largely procedural votes. They usually pass without a lot of fanfare. The most recent was in February of 2010. But the debt limit vote of today has taken on added significance a) because of the state of the economy and b) because of the politics of the moment. 2010 saw the majority in the House of Representatives swing back to the Republican side. And a large portion of those new republicans were tea party candidates. These Tea Party candidates campaigned on a platform of fiscal responsibility and fiscal conservatism. Specifically the need to stop spending in Washington and the need to begin to pay down the national debt.
So an issue like raising the debt ceiling is precisely the type of issue they feel they were sent to Congress to address. The fact that the US has once again reached its limit of debt and has to raise the ceiling again is a symptom of precisely the kind problem these newly elected Congressmen and woman were sent here to remedy. That’s how they view this issue and they have chosen it to show just how firm they plan on standing on those principles.
So what are the consequences of not raising the debt limit? What’s at stake? Well, right now there is a monthly budget deficit of about 120 billion dollars. So the federal government spends about 120 billion dollars more a month then it takes in. How does the government make up for that difference? It borrows it. It issues debt in the form bonds, sells it and then uses those funds it needs to make up for the shortfall.
If we fail to raise the debt limit the federal government will be unable to borrow those funds. There are monthly bills in essence that will have to go unpaid. There will be areas of the federal budget, funding for agencies, defense spending, benefits spending etc, that will cease to be funded. In other words, obligations the federal government has to its citizens and obligations citizens rely upon will go unmet.
There is also another aspect to the problem. In fact, some would say it’s the most important aspect of this problem. Part of those obligations that the federal government currently has are payments on past debt. Part of the federal government’s monthly budget goes to paying off creditors who we’ve borrowed from in the past. If we fail to honor those obligations, our credit rating will suffer. It’s not much unlike when an ordinary person fails to make a scheduled payment on a loan that he or she has taken out. Their credit score suffers. And what happens is that person begins to be viewed as a little more of a credit risk. It becomes more expensive for that person to borrow in the future because they are seen as a risky investment.
So it will be with the US Government if we fail to continue paying those debts and there is a default. The US’ credit worthiness will suffer. So what are the consequences of that? Well, if the US credit worthiness suffers and we are seen as a risky investment, it will become more expensive for the US Government to borrow in the future. Because US Treasury Bonds will be perceived as being a riskier investment than they previously were, the interest rates on them will have to be higher to entice investors to continue to buy them. So it will be more expensive for the US Government to borrow going forward.
The problem for you and I, the average American, is that there are many interest rates that are pegged and connected to the interest rates on Treasury Bonds. The Interest rates such as those on mortgages, credit cards and student loans. And if the interest rates on US Treasury Bonds go up, chances are very high that those instruments that use the Treasury Bond Rate as a benchmark will increase as well. So you might find yourself suddenly in a situation where mortgage rates increase and credit card interest rates increase as well. And in a very fragile economy such as the one we are in, that could prove to have devastating effects.
Now as I’ve mentioned before these votes to raise the debt limit are pretty common and up until this year, have proved to be largely unceremonial. They usually get passed without much notice. The issue has become a large one today because of the politics of the moment and because of the fiscal state our nation is in as well.
So where is the impasse stemming from? Well, Republicans, and specifically the Tea Party Republicans believe that they were sent to Washington last year with a mandate from the people to shrink the size of government. They believe government is too large and spends way too much money. So the number one item on their agenda is shrinking the government and curtailing some of the spending that is going on.
They also believe that the current administration, the Obama Administration has no item on their agenda other than increasing spending. So they have chosen to link these two issues. They have chosen to tell the Administration, we will not give you an increase in the debt limit unless and until you give us cuts in spending in programs and agencies contained in the federal budget. They have linked these two previously, never-before linked issues.
Now these lawmakers feel that holding firm on the debt ceiling issue gives them the only leverage they would otherwise have against the Administration to cut spending in a significant way. The President originally wanted the vote on the debt ceiling to be its own stand-alone vote. But Republican house members believed that refusing to increase the debt limit was the best way to ensure they got the best possible deal out of the president.
Now, Democrats are saying that by proceeding in this way, Republicans are basically holding the nation’s economy hostage. They argue that if the debt limit failed to be raised and the country was forced to default on its obligations or some would argue even worse, suffer a downgrade in its credit rating, the real loser would be the nation as a whole. President Obama and Congressional Democrats would not be affected by higher mortgage or credit card interest rates. Rather, it would be average Americans who are struggling to get by in an already sluggish economy that would pay the biggest price. Democrats would like the issues to be separated. They would like the debt ceiling to be raised, and separately but simultaneously, have a debate about spending levels and the nation’s deficit.
The Tea Party’s cause is a noble one. And its concern is justified. The national debt is a major cause of concern. And because of interest growing on the debt, it’s a problem that if left unchecked can and will become a major threat to the nation’s well being. And it’ll happen in the not too distant future either. But as with most large issues most everyone agrees that there is a problem, and on the nature of the problem. The disagreements arise on how to go about solving it.
The United States currently has a 14 trillion dollar deficit. That’s trillion with a “T.” A deficit like that does not get built up overnight. It doesn’t get built up by one administration, or one President, or one party or even one Congress. There are plenty of co-conspirators and accomplices that contribute to a problem that gets to be this large. Because this debt wasn’t built up overnight, it is also impossible for it to be undone overnight.
It’s true that there is anger in this country over the current state of affairs. That anger is real, it’s palpable, and it is legitimate. The Tea Party deserves some credit for bringing this issue to the forefront of our national politics. And for changing the nature of the debate in Washington and in the country as a whole.
But we cannot be reckless or rash in how we go about changing direction. The Tea Party has succeeded in changing the debate and has succeeded in getting a significant down payment on our national debt. That has to be enough. For now. Playing chicken with economic forces and holding our economy hostage in this way is dangerous at worst and counterproductive at best. If we default or even if we don’t default but the world’s confidence in America’s ability to solve its problems in a wise and thoughtful way is shaken, the consequences of that can prove to be disastrous. Also, if the Tea Party pushes too hard and is seen as unreasonable or inflexible, then it will lose its momentum and squander a very good chance to achieve some of the main goals it professes to have.
Some describe the national debt as being like a cancer growing inside of America’s body. And the analogy is appropriate. The national debt is a big problem and if left unchecked will only get bigger and only get worse, and threaten to overtake the national well being. But operations to remove cancer cells are done carefully with scalpels. They’re not done indiscriminately with machetes and axes. And that is the perception that the Tea Party’s actions are creating. That all they care about is the advancement of their agenda, even if it comes at the cost of harming the very system they’re purporting to save. Getting the nation’s debt under control and getting the federal government to stop mortgaging our children’s futures, are large and important tasks. The Tea Party needs to be much more interested in long term political change, than in short term political victories.
There is a potential here to reach an agreement that will make a significant down payment on our nation’s debt problem. The Tea Party should recognize it as such, make an appropriate deal, and move on to the next debate. Not doing so will only exacerbate the problem. And it’ll make the tea party part of problem, not part of its solution.