Fresh from the “fiscal cliff” — where Congress punted the spending cut portion off by sixty days — US President Obama and Congress are now staring down both the $200 billion in spending cuts and the debt ceiling debate, all for the end of February.
The United States has a law that limits the formal amount of debt that can be issued by the US Treasury. (Unfunded future liabilities do not count, which is why the total outstanding promises to pay by Washington total some $272 trillion, when the debt ceiling is fixed at $16.38 trillion today.)
In any event, right around the start of the new year, the Treasury hit the point where the amount of debt it had outstanding in the marketplace (Treasury bonds, bills and notes) hit the magic debt ceiling number. Since then, outgoing Treasury Secretary Geithner has been robbing Peter to pay Paul to keep the game going in Washington. Federal pension funds have been given IOUs to replace good old cash and assets, the Social Security trust has been milked, and the government has gone into “slow to pay” mode on transfers to the states and accounts payable to suppliers (e.g. rent on US military bases overseas).
Washington goes through these convulsions every time the debt ceiling comes up; it’s nothing new. What is new is that by March 1 places that can be looted temporarily to cover the rollover of old debt will be exhausted — and at that point the “full faith and credit” of the US Government will be tested if the limit isn’t raised.
Canadians, not used to the notion of the debt ceiling, need to remember one thing. Congress doesn’t pass balanced budgets. It overspends annually — to the tune of nearly 40 cents for every dollar in taxes it takes in. It continues to raise the stakes of spending what it doesn’t have even in crises: the fiscal cliff bill was 45 pages long, one half page of which handled the business of the cliff, and the rest was more spending (giving a tax abatement to a specific company or industry is spending no less than building bridges is).
The debt ceiling has been reached because Congress — with its Republican-controlled House (where the spending bills originate) — won’t rein themselves in. Raising it merely allows the US to “pay” for what has already been spent (since it doesn’t have the money to discharge Treasury instruments as they come due).
That’s not to say that the Democrats are lily-white in all this. They, too, love to spend what isn’t in the till — and, aside from not renewing a temporary tax drop on individuals making more than $400,000 or couples making $450,000 or more, they’re not interested in raising taxes, either.
Odds are, the Tea Party types in the House will take the debt ceiling to the wall — and maybe beyond. (Too many of them, including Rep. Paul Ryan, who ran for the Vice-Presidency, show no grasp of grade five arithmetic, much less real economics, and their public statements indicate a willingness to shut the government down, as Newt Gingrich did in 1995, rather than raise the ceiling and allow the Treasury to fund what they’ve already spent.)
Yes, if they do force the ceiling to stay in place where it is, Washington will be laying off staff in the various agencies, as it did in 1995. But the US will also be in technical default.
Not to mention that spending must, at that point, by law, drop to what’s taken in in taxes.
There are those on Obama’s left that think that’s just fine, since it will allow the Pentagon to be reined in. Well, if you cut 100% of the military budget, you’d still have $600 billion in savings to find. (That’s not to say that the Pentagon couldn’t afford a diet; it’s just not the panacea some think it is.)
Tea Party Republicans, on the other hand, see the opportunity to drive a stake into Social Security and Medicare. The only problem there is that the voters who elect them are the sorts who stand around saying “Government, keep your hands off my medicare” (evidently not recognizing that their “free after 65” medical system is a government program). Good luck explaining it, too.
Congress really only has one choice on the debt ceiling: raise it. Default would kill the US dollar as the world reserve currency, forcing the US to suddenly pay much higher (Greek-style?) interest rates to borrow (no more free ride from the Fed, which is out of “bullets” anyway), forcing the US economy to “eat” commodity price increases affecting food and fuel as world commodities shifted out of the dollar, and, oh, yes, dropping 6-10% out of the country’s GDP with the inability to spend past the tax limits.
Raising taxes takes just as much out of the GDP: if US taxes rose to cover its deficits to keep spending the same, the country’s GDP would also fall by 6-10%.
But Congress must also get spending under control. That will mean a grand bargain, where the Pentagon gets shaved bald, social programs take a hit, tax breaks get ended, and — most important of all — the US medical system gets tackled.
Not Medicare alone. The whole system, which (under Obamacare) locks in medical monopolies, insurance company profits and pharmaceutical and medical equipment price gouging. All of these are sustained by government regulations that preclude the “free market” America is supposed to have in health care.
You won’t hear that from Obama, from Speaker John Boehner, from Paul Ryan, Senator Rand Paul, or any of the other popular voices on this issue.
Nor will you hear, from any of them, the obvious moves on the revenue side: a GST for America, for instance, or tax code simplification (as done by Ronald Reagan) to eliminate the loopholes that reduce revenues for those who can take advantage of them, or wiping out the mortgage interest deduction, which allows the magical 47 per cent that don’t pay federal income tax that Mitt Romney talked about during last year’s campaign to exist (those making too little to surmount the standard personal deductions would be equal to the poverty class of about 20 per cent of Americans; the rest don’t pay because of the mortgage tax distortion).
The world is awash in US paper already. Countries are already moving to divorce themselves from US dollar hegemony. The clock is ticking.
Raising the limit, and getting spending and revenue in line, is the only course of action for America to take that will keep it from default later this decade.
But I don’t see leadership in either the White House or Congress that can get there from here.
So buckle up. America’s about to hit the wall, and we Canadians have front row seats. (Unfortunately, that’s like being in the first row at a hockey game where the glass has been removed...)