Debt Ceiling Fight Club

Bring on the next round of ugly budget battles.

At the current rate of federal spending, the national debt will crash through its legal $16.4 trillion limit by January 2013. When that happens, both sides of the aisle will be hoping to avoid a repeat of the hysterical debt ceiling showdown in the summer of 2011. The Democrats have not managed to pass a budget in years and do not have plans to reduce our mounting debt. Republicans generally wind up trying to weasel out of whatever spending cuts they agreed to before the ink on the deal has dried.

Treasury Secretary Timothy Geithner has argued that when the time comes to raise the debt limit, members of Congress should avoid another debate about offsetting the inevitable hike with cuts in spending because of the “drama and the pain and the damage that they caused the country” last time around. Geithner would rather have the power to raise the debt ceiling when cash is needed, with no strings attached.

While the Treasury secretary is correct that any call to cut spending will cue much drama, he is wrong that we should avoid it. In fact, precisely what this country needs right now is another epic fight over the national debt. Only this time, when the smoke clears, we need to see actual spending cuts that kick in today, not fake promises of fiscal responsibility tomorrow.

As the Cato Institute’s Jagadeesh Gokhale explained in Politico on June 7, in the previous showdown “the only pain and damage that resulted was probably to [Geithner] and his staff—who had to figure out ways to keep the federal spigot open in case the Treasury’s borrowing authority expired during early August last year. Financial markets and the economy provide no evidence for the Treasury Secretary’s ‘pain and damage’ claims.”

Gokhale is right. While many argue that the Standard & Poor’s (S&P) ratings downgrade for U.S. bonds last summer was a direct result of Republican opposition to raising the debt limit without significant spending cuts, the reality is different. It was Washington’s unwillingness to cut spending and put us on a sustainable path, not the melee staged for the cameras, that caused the downgrade. Weeks before the August 2011 debt limit deal, S&P warned that it would downgrade the U.S. bond rating unless lawmakers took credible steps to reduce government spending. S&P laid out clear criteria for avoiding a downgrade: 1) reduce the debt by about $4 trillion, 2) agree to a credible plan within three months, and 3) guarantee this newfound fiscal discipline will stick.

S&P wasn’t bluffing. When an agreement was reached to raise the debt ceiling by $2.1 trillion as part of the Budget Control Act (BCA) of 2011 without the kind of credible debt reduction measures that S&P asked for, the U.S. lost a notch on its AAA rating. S&P correctly concluded that the deal was a joke. The debt reduction package was much smaller than the one demanded by the ratings agency, committing only $900 billion in spending cuts through budget caps, plus another $1.2 trillion in deficit reductions.

Only in Washington would anyone believe that a promise to reduce the debt by $2.1 trillion over 10 years in exchange for $2.1 trillion in new debt right now is fiscally responsible. Especially since all parties were well aware that more debt would be required within the next two years. Even if all spending caps and cuts were implemented, government spending would still grow from $3.6 trillion in 2012 to $5.2 trillion in 2020, including a 10 percent increase in military spending above and beyond war spending.

The BCA did not make significant changes to the programs that hold the key to our long-term fiscal sustainability: Medicare, Medicaid, and Social Security. Nor did the deal provide credible guarantees that Congress would go through with all of the spending reductions. In fact, since the deal was signed, Republicans and Democrats alike have been looking for ways to avoid the cuts. Appropriators have ignored the budget caps imposed by the law, and many lawmakers have been vocal about reducing the automatic budget cuts set for January 2013.

Geithner’s threatened “pain” and “damage” also did not materialize. Interest rates stayed low as markets shrugged off last year’s contentious debt ceiling negotiations. This reaction is evidence that investors never truly feared the government would default on interest payments owed to bondholders. That’s because if an agreement had not been reached, it is likely that the government would have paid the $29 billion it owed bondholders in August and decided which expenditures not to pay for at that point.

That being said, it would be dangerous to read the country’s low interest rates as a sign of its credit­worthiness. The Federal Reserve is keeping rates low in the hope of boosting the economy. Another reason for our low interest rates is that most other countries are in even worse fiscal shape than the United States. This extraordinary situation, which makes the U.S. look better than it should, cannot continue forever.

Perhaps more important, economists have shown that in some countries (excluding Japan) very high levels of debt haven’t led to a systematically large increase in interest rates. In a recent National Bureau of Economics working paper called “Debt Overhangs: Past and Present,” economists Carmen Reinhart, Vincent Reinhart, and Kenneth Rogoff show that in 11 of the 26 cases in their sample, countries in which debt exceeded 90 percent of GDP for at least five years did not experience an increase in interest rates.

But stable interest rates are not a sign that these countries are in good shape. Economic growth in the 26 cases was 1.2 percentage points lower than in other periods, “the average duration of debt-overhang episodes is 23 years, and it produces a ‘massive’ shortfall in output that is almost one-quarter less, on average, than in low-debt periods.” In other words, the fact that bond markets are blasé about high levels of debt in countries perceived as safe tells you very little about how well they are doing. It certainly should not be mistaken for a signal that the government can borrow more without risk.

Yes, the fight over raising the debt ceiling last year was brutal. But markets and investors are not afraid of a little political hair pulling and eye gouging. The real horror was that neither side was serious about cutting spending. And for that to change, things are going to have to get a lot uglier. 

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • Pro Libertate||

    When we get downgraded again, will that be bad? Or is that good this time around?

  • John||

    If Obama is in office, it will be good. Nothing helps his re-election chances better than bad news. A good crisis makes people want to vote for the guy with the experience.

  • Palin's Buttplug||

    Lame duck Congress will confront this issue first. When they fail the do-nothing House of Boehner will close its ugly doors the last time.

    I actually feel sorry for the Speaker.

  • John||

    Yeah because the Dems are retaking the house.

    You really do work on being a complete demonic retard don't you?

  • T o n y||

    If Romney keeps up his performance the House could very well swing.

    I'm starting to think that not only is Romney a robot, he's had his programming hacked by the Obama people.

  • John||

    That is why the race is a dead heat retard. Tony, I know you are stupid and a sock puppet sent here to mouth talking points. But good God you have got to do better than that.

    Don't your masters have some kind of a quality control program? Do they ever coach you guys or weed out the more stupid of you?

  • T o n y||

    The fact that I took three swigs of Nyquil last night doesn't make the electoral college map look any better for Romney.

  • JWatts||

    "If Obama is in office, it will be good. Nothing helps his re-election chances better than bad news."

    I think it's more like:

    If it's bad news, then it's the fault of Bush, or Republicans or Wall Street or 'insert scape goat' and Obama is working extremely hard on are behalf to fix the problems everyone else has caused.

    If it's good news, then that's proof that Obama has been working extremely hard on are behalf.

  • Alan Vanneman||

    So, Veronique heart Brad, eh? Well, I guess the three chicks who read Reason deserve their own brand of eye candy from time to time.

  • ||

    Did you want him all to yourself, you little turd sniffer?

  • Randian||

    Bad Alan, bad! What have we told you about the Orange Carpet? You go OUTSIDE!

  • Tim||

    Other than Mad Max style apocalypse, the only way out of this is massive inflation. I believe both parties are down with that.

  • R C Dean||

    So true. Although you can have both, you know: Currency debasement/(hyper)inflation AND a contractionary depression.

  • Paul.||

    Depresflation?

  • Pro Libertate||

    The Great Repression.

  • Bardas Phocas||

    The ongoing drought gives that special Joad family touch to the whole thing.

    "The bank [FED] is something more than men, I tell you. It's the monster. Men made it, but they can't control it."

  • Palin's Buttplug||

    committing only $900 billion in spending cuts through budget caps, plus another $1.2 trillion in deficit reductions

    Romney and Ryan don't like these cuts at all.

    (at least they say they don't.)

  • Stormy Dragon||

    In fact, precisely what this country needs right now is another epic fight over the national debt.

    Yes, but should that epic fight be occuring when the debt ceiling is raised? It SHOULD be happening when the appropriation bills are passed. It seems highly disengenuous to pass a bill authorizing spending that exceeds revenue (as the house just did 329-91) and then get in a tiff when the treasury issues more debt.

    The fact the spending bill passes with little or no debt, but there's a big fight over the debt ceiling shows how unserious were are about controlling spending. It's a way to grandstand over spending while avoiding the political difficulties of calling for specific cuts.

  • Stormy Dragon||

    That should be "passes with little or no debate"

  • John||

    Pretty much. It just shows that they don't want to cut spending now, just future spending, which is another way of not cutting spending. It also gives them a way to play both sides by voting for the spending and then later voting against it.

  • kinnath||

    The Bush tax cuts lowered rates for all tax brackets. When they expire in January, everyone gets fucked in ass including the working poor.

    Another win for Barry.

  • ||

    Further proof that people like Tony hate the poor.

  • T o n y||

    The policy of having a debt ceiling is clearly a greater danger to the country than the debt itself.

  • kinnath||

    Thanks for coming by to piss in the pool one more afternoon.

  • T o n y||

    I see it as dipping into a pool of piss.

  • ||

    Or as you would call it, bath time.

  • John||

    Tony, you have got to try harder. The talking point is that we need to borrow to keep the economy going. It is not that Obama should be able to borrow in everyone's name as much as he wants. You are supposed to avoid that logical conclusion not embrace it you dope.

    Do they not even train you people in how to troll anymore?

  • Calidissident||

    Good one Tony. Funny stuff

  • R C Dean||

    I do enjoy the way Tony refers to a Constitutional requirement (that Congress approve all debt) as a "policy."

  • T o n y||

    The Second Liberty Bond Act of 1917 is the Constitution?

    If anything the debt ceiling is unconstitutional, since it imposes a limit on Congress's ability to pay debts already incurred. It's been automatically raised with every budget, except in a few cases when it caused government shutdowns and other disasters.

  • ||

    Section 8 - Powers of Congress

    The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

    To borrow money on the credit of the United States;

    You are an idiot Tony.

  • T o n y||

    ?

  • John C. Randolph||

    government shutdowns and other disasters.

    A government shutdown is a brief reprieve from an ongoing disaster.

    -jcr

  • Heartless Bastard||

    So the next time we have a clown in a red suit instead of a blue one, you'll still be in favor of no debt ceilings right? You were all for raising it when W needed a little extra?

  • ||

    Ever since she swallowed the kool-ade on nuclear power, I haven't been able to take Veronique de Rugy seriously.

  • R C Dean||

    Here's a thought:

    Congress has to approve all debt, per the Constitution, right?

    I wonder if things would change if no vote in favor of issuing debt were valid unless the Congresscreature first ponied up his family's pro rata share of the increase.

    Oh, another trillion in debt? Fine, to approve that you will first have to pay (cash, no checks, we weren't born yesterday) $X,000. Sure, these guys are rich, but they are also cheap, sponging bastards, so having to actually shell out their own money will cause them some pain.

  • Heartless Bastard||

    We can start by sending a bill for their share of the damage they already caused. Have the IRS seize property as needed.

  • ||

    economists Carmen Reinhart, Vincent Reinhart, and Kenneth Rogoff

    WHAT!?!?

    Published economists that disagree with Krugman!!!

    Impossible!

  • John C. Randolph||

    "Budget battle", my ass.

    What's coming up is another round of the Ruling Party posturing and pontificating over whether the money we don't have should be wasted preparing to fight the Soviet Union, or wasted on energy boondoggles that don't work. At the end of the day, they'll spend as much as they can "borrow" from the counterfeiter cartel, and this will continue until the dollar collapses.

    -jcr

  • Tom Beebe||

    Cut foreign aid, to start with. What has it bought us? Friends as in Lybia, Egypt, Afghanistan? Security (see above)? Jobs in the USA? Cut spending for military bases outside the US. Cut congressional salarys and budgets. Cut White House travel allowances. But a few!

  • Heartless Bastard||

    Why is it that the party out of power always gets it right but then goes nuts once they get elected. Even our current clown-in-charge got it when the last clown was in office.

    "The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. …

    Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better."

  • شات عراقنا||

    thank you

  • tipuasher||

    I understand your explanation and would love to have everything that you enter
    http://katebroadwell.com

  • cinsel chat||

    good thanks sohbet
    cinsel sohbet

GET REASON MAGAZINE

Get Reason's print or digital edition before it’s posted online

  • Video Game Nation: How gaming is making America freer – and more fun.
  • Matt Welch: How the left turned against free speech.
  • Nothing Left to Cut? Congress can’t live within their means.
  • And much more.

SUBSCRIBE

advertisement